020 3740 5856

Contact us today

If you have a query for us, please fill in this short form. We aim to respond within a few hours. 

Request a call back

If you would like to talk with one of our advisers at a time that is convenient to you, please fill in this short form.

Contact Sterling and Law

If you have a query for us, please fill in this short form. We aim to respond within a few hours.

This all sounds simple enough but there are some pitfalls to be aware of. To erase the inheritance tax liability completely, the gift must be made unconditionally.

Article by Akwasi Duodu

Taxed to death

We spend our lives paying all sorts of taxes. Income tax and national insurance on your earnings, income and capital gains tax on your savings. Stamp duty when you buy a house, council tax to live in it. Car tax, fuel duty, value added tax; excise duty and corporation tax if you run your own business.  And after paying all those taxes during your lifetime, you are expected to pay inheritance tax when you die – there is just no escape! None of these taxes are popular, but inheritance tax is without question the most loathed of all.

Is it fair to be taxed again on your taxed wealth after your death? Many don’t think it is and believe inheritance tax should be abolished. With house prices having pushed many ordinary people’s estates over the inheritance tax threshold, one of the most common questions I get asked as a financial adviser is “Can I gift my house to my children to avoid inheritance tax?”

Yes, it can be done, but it certainly isn’t straightforward. There are pros and cons, and these should be considered carefully before proceeding. If your estate is worth more than £325,000 or £650,000 for married couples, careful planning may be necessary to avoid your children paying 40% inheritance tax on the difference when you die. Try this Inheritance Tax Calculator, Which?

Gifting your home

Of all your assets, your home is the asset most likely to push you over the inheritance tax threshold. Gifting your home to your children is therefore a natural consideration. The good news is that you could gift your home to your children and if you lived for at least seven years after the gift was made, it would be removed from your estate and no inheritance tax would be due. This arrangement is called a potentially exempt transfer and becomes a fully exempt transfer after seven years.

This all sounds simple enough but there are some pitfalls to be aware of. To erase the inheritance tax liability completely, the gift must be made unconditionally. If the parents benefited in any way from the property, the gift would be deemed a “gift with reservation of benefit” or ‘GROB’ and would remain in the estate. This means that if you decided to gift your home to your children but continued to live in the property, the gift would fail. The only way to get around moving out completely would be to rent the property back from your children and pay rent at the market rate. If you paid less than the market rate, the house could remain in your estate and would be subject to inheritance tax. Your children would of course have to pay income tax on the rent received.

Alternatively, you could gift half the house to your children and split the bills evenly. This way, their half of the house would not be subject to inheritance tax though the rent would still be taxable. Remember, in both scenarios, you’d have to live for seven years before the gift would be deemed complete.

Selling your home cheaply to your children

One alternative would be to sell your home cheaply to your children. The discount on the property would be treated as a gift and would be exempt from inheritance tax after seven years. Bear in mind however, that there would be stamp duty for your children to pay in purchasing the property and you could end up paying capital gains tax if the property wasn’t your main residence.

Equity release to reduce inheritance tax

Equity release mortgages allow you to release funds from your home. The funds released could be used for a number of reasons. You could spend it yourself or gift it to your children to help them get on the property ladder, for example. Any such gifts would be subject to the seven year rule after which the gift would fall out of your estate. This method is becoming more popular and is proving quite effecting in inheritance tax planning.

Nonetheless, inheritance tax planning is an area riddled with pitfalls, traps and drawbacks. Our advice would be to seek independent financial advice before proceeding. With careful planning, it might just be possible to escape some or all of the most unpopular tax in the country.

Akwasi Duodu

Share this article:

Subscribe to our newsletter

Request a Free callback