Inheritance tax planning: Gifting my house but living in it

Peter McGahan continues to examine how property ownership and rising prices affect your exposure to inheritance tax.
inheritance tax planning

Last week, we looked at how house prices are causing issues for property owners and their Inheritance Tax planning efforts (well, their children to be fair).

I’ve subsequently been asked about gifting a house, but you are still living there, and whether that is acceptable or not.

The property is (alongside a pension) normally the biggest asset inside someone’s estate. I’ve previously covered Inheritance Tax on pensions so I will stick to property in this column.

Gifting an asset away, but retaining an interest in it, is caught by tax legislation on the reservation of benefit anti avoidance rules which date back to 1986.

But, in the instance of a property, this is ‘gifting and living in it’.

The oldest example I remember, which dates back to my early financial advice days, was a gift of a painting to children, but the painting stayed in the home of the donor, thereby gaining an ongoing benefit from it.

It is effectively a Gift With Reservation and would fall back into the estate on the death of the donor, defeating all of its aims, so much so, the revenue have clawed back hundreds of millions of pounds from families because of these misunderstandings.

If you want to make a gift of a property you have to give away all of the rewards and benefits of the asset if you want to exclude it from the value of your estate at the time of death.

Naturally if you did, and it qualified, this gift also takes seven years to fully pass outside of the estate.

In 1950, the average house price was £1,891 which was 3.6 times annual earnings. Today it is £250,772 which is 8.4 times average earnings. This is an economy built on debt, and rising prices as we said last week, creates a perception of wealth for the sole homeowner encouraging borrowing and pushing the economy along.

In reality, it can become a large headache for Inheritance Tax and other housing taxes.

Gifting a property away can also create a Capital Gains Tax issue, but, if you gift your main home to your children, it qualifies under private residence relief. Gifting a second home, however, will attract Capital Gains Tax if the property’s gain since purchase is more than the current Capital Gains Tax allowance – so be mindful of that.

A doubling up of complications can apply as regards to the gift with reservation rules. If you gave your home away, retained an interest in it, and it was defeated by the revenue under the gift with reservation rules, you would potentially be still clobbered by Capital Gains Tax from the date of the initial gift attempt. This is because the tax is assessed irrespective of the success of the Inheritance Tax gift. So, a potential double whammy, and the longer the gap between the attempted gift and death, the greater the Capital Gain.

There are complications with gifting assets outright. Gifting to a daughter to later have her ex-boyfriend as your tenant is not very palatable. I can’t say this crossed my mind as any boyfriend arrived at our house.

If you do decide to gift the property to your children and live there, you will need to pay full market rent which also needs to be kept up to date in terms of the market value. Imagine you are a tenant and use normal legal rental agreements to ensure you are the right side of Gift With Reservation rules. That isn’t actually a bad thing for some people as they are giving away a large asset, saving the Capital Gains Tax and future Inheritance Tax, but also gifting away an amount each month which reduces the estate further (rent).

If you have a secondary property, consider gifting the rent from that to your children or others, based upon the ideas from last week.

You could also gift a share of the land or house. There needs to be shared living which can be limited to different areas of the building or different times. A later amendment to the legislation allows for this to happen.

Inheritance Tax planning crosses from your Independent Financial Adviser to your accountant or lawyer, and advice should always be taken to achieve the security you need for your family.

If you found this content helpful and have a question about Inheritance Tax Planning, you can call 01872 222422, email [email protected] or visit to talk through your options.

For more expert tips and advice about estate planning and IHT, visit our Finance channel.

Last modified: August 4, 2021

Written by 1:21 pm Tax