Inheritance Tax: Can I gift my house to my children and still live in it?
The number of queries we receive from potential clients asking, “Can I gift my house to my children?” or “Can I put my child's name on my house deeds?” to avoid inheritance tax is endless. Unfortunately, we must tell them all the same thing - it just isn’t that simple!
In the UK, whilst you can legally gift your house to your children and still live in it, there are several tax consequences and potential risks in doing so. You should consider these very carefully and seek legal advice before taking any action.
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What is inheritance tax?
Inheritance tax is a tax applied after a person dies, if their estate is worth over a certain amount. Their estate includes property, money and possessions. The level of inheritance tax depends on a number of factors. These include the value of your estate and who the beneficiaries are.
Gift with Reservation of Benefit (GROB)
Generally speaking, in the UK, transferring ownership of property from a parent to a child when the parent continues to live there does not avoid inheritance tax.
HMRC describes this as a Gift with Reservation of Benefit (GROB). They will argue that you have not made a valid gift to your children.
This is because you have gifted your home to your children but you have retained the whole benefit of the property. You still live there and they do not. The consequence of this is that HMRC will still include the full value of that home in your estate when you die, regardless of when you gifted it.
According to a recent article in The Times, “since 2017, the tax office has clawed back £608 million from families because of misunderstandings about the rules.”
One possible way to mitigate this is by paying rent to your children. You will however need to pay market rent to take it out of the inheritance tax net. The market rent will be the going rate for similar local rental properties. You need to keep this under review as the market rates can increase or decrease over time.
Bear in mind that your children will then be liable for income tax on the rent you pay them.
You can find some helpful information about this on SAGA’s website.
A potential way of avoiding the GROB regulations is for you and your child/children to co-habit. Provided that each of you pay your share of the household expenses, then the transfer may be treated as an outright gift.
If you continued to pay for all of the household expenses and your children do not take over their share, you would be treated as benefiting from the whole property and therefore not making a gift.
In order for the transfer to be regarded as a gift, each co-owner must pay their share of the upkeep and outgoings associated with the property.
This is a complex provision that, if not followed correctly, can still result in Inheritance Tax being charged . Legal advice should therefore be sought before any such provision is considered.
Potentially Exempt Transfer (PET)
Normally, if you were to make an outright gift, it would be treated as a “potentially exempt transfer”. This is for the purposes of inheritance tax. This would pass outside of your estate if you survive for 7 years.
If you die within seven years and the total value of gifts you made is less than the Inheritance Tax threshold (currently £325,000), then the value of the gifts is added to your estate and any tax due is paid out of the estate.
However, if you die within seven years of making a gift and the gift is valued at more than the Inheritance Tax threshold, Inheritance Tax will need to be paid on its value, either by the person receiving the gift or by the representatives of the estate.
If you die between 3 and 7 years after making a gift, and the total value of gifts that you made is over the threshold, any Inheritance Tax due on the gift is reduced on a sliding scale. This is known as ‘Taper Relief’
What are the risks of gifting my house to my children and still living in it?
In addition to the inheritance tax consequences, you must also consider the personal circumstances of your children.
Obviously no one wants to consider divorce or bankruptcy for their children, but you never know what’s round the corner.
- If your child gets divorced, the property may form part of the divorce settlement. Their former partner could be entitled to half of it.
- If your child is made bankrupt, the property may have to be sold to pay off their debts.
- If your relationship with your child unexpectedly breaks down or changes, they could evict you from the property.
- If your child unexpectedly dies before you, the property will pass on to your child’s beneficiaries. These beneficiaries may wish to sell or live in the property and could evict you.
You are no longer the homeowner and have no rights to the property. Therefore, in these scenarios, you could lose your home.
Your local tax lawyers
Transferring your home to a family member involves a lot of complicated tax and other financial implications. So, it is important that you seek legal advice before making any decisions.
We are very proud of our reviews and accolades and aim to provide all clients with a quality service. We are included in the Legal 500 directory for personal tax, trusts and probate. Furthermore. we are ranked in the Chambers and Partners High Net Worth Guide for Private Wealth Law. Currently, we are number 1 for Wills, Trusts and probate in Welwyn Hatfield, on the Review Solicitors website. You can read all our reviews here. This places us as one of the best tax planning solicitors in Hertfordshire.
If you have any questions about estate planning or inheritance tax, please contact our Wills, Trusts and Probate Team who would be happy to help.
It may also be helpful to speak to a financial adviser about these issues. We have a network of local financial advisers that we can refer you to, if required. For example, Beechwood Financial Services have an office on the same street as ours in Welwyn Garden City.
You may also wish to find out more about why you should use a Solicitor to make a Will here.
We look forward to hearing from you.