Gifting your home to your children: is it a costly mistake?

If you’re thinking of giving away your home to your children, it may be because you’re thinking about inheritance tax. That’s understandable when the numbers of people paying the tax, and the amounts paid, are going up.

Or perhaps you’re hoping that your home won’t be included in the means test to get funded long-term care. But gifting your home to a family member is a complicated process – and it may not achieve what you’re hoping for. Below, we’ll outline the risks and the important points to consider.

On this page: 

• Implications for inheritance tax
• Gifts with reservation of benefit
• Capital gains tax and other considerations
• Gifting a property to reduce care home costs
• Where would you go?
• Summary: Things to consider

Implications for inheritance tax

The amount of inheritance tax (IHT) being received by the government is rising year on year, due to frozen allowances and rising property prices that mean people are leaving more valuable estates when they pass away. And it will increase even further when pensions come into the scope of inheritance tax, as well as reductions in IHT relief on farm and business property. 

Official figures show that for many people paying inheritance tax, their home is the most valuable part of the estate. This is especially true for estates worth up to £1 million. 

Scott Gallacher, a chartered financial planner at Rowley Turton, says gifting a property would normally be arranged via a solicitor. It can be done either directly – gifted to an individual or number of people – or indirectly, via a trust.    

If you were to make an outright gift of the house to your child, this would be known as a “transfer for nil consideration” or “deed of gift”, as no money would be changing hands.

If you do this in a bid to reduce the value of your estate, it would be treated as a “potentially exempt transfer” (PET) for the purposes of IHT calculation.

If you die within seven years of making the gift, then the property would fall back into your estate when calculating IHT and become what is known as a ‘chargeable consideration’.

For this reason, it’s a good idea to get an independent valuation of the property when gifting so you know how much it may add to the estate. 

If you die between three and seven years from making the gift, and you’ve given away an amount over the IHT allowances, then taper relief, which can reduce the amount of IHT paid on a sliding scale over time, may lower the rate on the amount over the threshold. 

If you survive for at least seven years after making the gift, there would be no IHT to pay. But this seven-year rule only applies to gifts that you no longer benefit from. In terms of a property, this means you give up any right to live in it, or to receive rental income, or a share in the proceeds of a sale. Gallacher says there should be no stamp duty to pay on such a gift, provided there is no outstanding mortgage.

Gifts with reservation of benefit

If you want to pass on your home but plan to remain living in it, you need to understand that your plans are likely to be scuppered by rules relating to “gifts with reservation of benefit”.

Ben Rogers, a chartered financial planner at Equilibrium Financial Planning, explains these rules mean that if you continued to benefit from the property after the gift, for example by still living in a house, the gift would not qualify as an exemption, and IHT would be payable on the value of the asset.

“For the house to qualify as a gift for IHT reduction purposes, you would need to pay your descendants a market-level rent once it has been gifted to them. Your family may have to pay income tax on the rent you pay to them.” There are other issues to bear in mind if you were to remain living in your house after giving it away.

Once you've signed over your property to your children, you'll no longer have any legal claim over it. This means that if you fall out with your children, they could potentially evict you. Equally, you could be forced out if your offspring decide they want to rent or sell the property – or live there themselves.

You also need to consider the possibility that your child may divorce. Gallacher says this is a ‘huge’ issue.  

“I normally reference the potential ‘50% divorce tax’, which means you gift property to the children to hopefully escape a 40% IHT liability, only to then lose 50% of that property to your son-in-law or daughter-in-law in the event of a divorce.

“This risk can be reduced by using a trust or asking the kids to sign a post-nuptial agreement, or a pre-nuptial agreement if they are getting married.”

“This risk can be reduced by using a trust or asking the kids to sign a post-nuptial agreement, or a pre-nuptial agreement if they are getting married.”

Capital gains tax and other considerations

Before gifting your property, you also need to think about other charges such as capital gains tax (CGT). This can be levied on properties that are not your ‘principal private residence’ – that is, the main home you live in. 

For example, if you gave a house to your child – and they chose not to live in it – they might have to pay CGT when they come to sell, if it rose in value over that time. Alternatively, if the property you are giving away is a second home or holiday home, then you may be liable to pay CGT on any increase in value that has occurred between first owning it and giving it away, even if no money is changing hands.

Gifting a property to reduce care home costs

Another reason people consider giving away their home is to try to reduce the amount of fees they pay for care in later life. The average cost of residential care in the UK has risen to £67,132 a year, according to comparison website carehome.co.uk. 

However, passing your property on to your offspring specifically to reduce the amount you may have to pay for care fees is unlikely to be successful. Rogers says if you were to apply for local authority funding, the council would carry out a financial assessment to determine how much you should pay for care.

“During this, you will be asked about previously-owned assets, and if the council believes that you intentionally gave away the property to avoid paying for care, this will be regarded as ‘deliberate deprivation of assets’.

“The property’s value would then be considered when your ability to pay for care is assessed – and you could find yourself without the means to pay for care as you no longer own the home.”

The ‘deliberate deprivation of assets’ checks can stretch back as far as the local council wants. So even if avoiding care home fees is not your intention when gifting property, you should do some research into the potential implications.

Age UK has a factsheet about deliberate deprivation of assets. You should consider speaking to a legal and financial professional to understand the risks.

• Read more about how to find the right care home.

Where would you go?

No matter which route you choose, deciding to get rid of your house is a huge decision, and shouldn’t be taken lightly. It also comes with the bigger issue of how you would pay for your ongoing accommodation.

Would your pension or other assets provide sufficient cash? Gallacher warns: “I think it’s dangerous to be gifting your own home with little benefit for the parent and I would generally caution against this.

“I would recommend everyone to undertake their own financial planning exercise, or see a chartered financial planner, before making significant gifts and jeopardising their own financial future.”

Summary: Things to consider

• Gifting property to children is far from straightforward, and you should always take professional advice and consider your own financial future first.  
• Giving property without a mortgage is possible through a ‘deed of gift’, but will still incur IHT if you pass away within seven years. 
• Once you have given away a property, you will no longer have any legal rights over it, and can no longer benefit from it in any way if you intend to remove it from your estate. 
• Think about whether you might be liable for capital gains tax, if giving a second property, or if your child might be liable in the future when they come to sell.  
• Be mindful of the rules around ‘deliberate deprivation of assets’. Your local council can view the gift as a means of avoiding paying for care home fees.