Can I gift my home to my children to reduce inheritance tax?
In today’s article, we tackle the issue of IHT, and whether gifting your home to your children can help avoid inheritance tax. Over the years, those liable for inheritance tax has risen, mainly due to rising property prices, particularly in the South East. That said, there are various ways to reduce or avoid this tax, ethically and legally.
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 wealth after your death?
Many don’t think it is and believe inheritance tax should be abolished. Furthermore, house prices have pushed many ordinary people’s estates over the inheritance tax threshold. As a result, 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.
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Gifting your home to your children to avoid inheritance tax
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.
Therefore, no inheritance tax would be due. This arrangement is called a potentially exempt transfer and becomes a fully exempt transfer after seven years. If you are unsure if your estate is liable for this levy, try this inheritance tax calculator, by Which?
Factors to consider
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 to reduce inheritance tax, 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.
Gifting half your house to your children
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 to avoid inheritance tax
One alternative would be to sell your home cheaply to your children to reduce IHT.
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.
Can equity release be used to reduce IHT?
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 effective in inheritance tax planning.
Nonetheless, inheritance tax planning is an area riddled with pitfalls, traps, and drawbacks. If you are considering using equity release to avoid or reduce inheritance tax, 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.
Summary: Can I gift my home to my children to reduce inheritance tax?
In conclusion, gifting your home to your children to avoid inheritance tax (IHT) is a viable strategy. Rising property values have increased the exposure to IHT for many, prompting individuals to explore various options such as equity release.
The process is detailed and there are many factors to consider and laws surrounding whether it is possible – such as the seven-year rule.
Need advice on inheritance tax?
At Sterling & Law, we have an extensive network of inheritance tax advisers covering London, the Home Counties, and the south of England.