Gifting the family home – the role (or not) of the home in IHT planning

The primary challenge is whether gifting your home would be effective for Inheritance Tax planning in the first place. This is because of the ‘Gift with Reservation of Benefit’ (GWR) rules. Basically, if you gift the title over the property to another person but continue living in it as if it were still your own, you haven’t really gifted the benefit of the property. In other words, you’ve reserved benefit for yourself. In this case, the title gift would likely be ignored and the value of the property is still included in your estate and IHT remains payable as if it was never gifted in the first place.

For the GWR rules to not include the property in the estate of the donor, they would need to pay a market rent for their use of the property. This would require committing to an annual, and potentially increasing, cost for the time they plan on living in the property – which could be for the rest of their lives. So, the concept and affordability of renting your own home back off the recipient should be carefully considered. It can be very unsettling to go from owning your home outright to committing to an annual rent payment.

We are also regularly asked what is considered a ‘market rent’ for the property. There is no specific HMRC guidance on this but usually requires obtaining valuations and quotes from an estate agent or qualified surveyor.

There can then be knock-on implications for the recipient when managing the GWR position. In this scenario, they have just become a landlord for the property gifted to them. They will have to declare the income on a tax return and pay tax on the income. This additional income could even push them into higher tax thresholds, increase student loan payments and reduce other allowances. Depending on the level of rent paid, they may even need to register under Making Tax Digital (MTD), with quarterly filing requirements. This income implication is just one of the examples of why it is important to consider the whole tax position across the family.

As with most other gifts, there is a seven-year clock that usually applies for the gift to be effective. If the donor dies within seven years of making the gift of the property, Inheritance Tax could still be due. This is a risk with most gifting, not specifically to planning with the home, but one that should still be considered as part of an effective Inheritance Tax plan. Especially if your objective is to be able to pass the property down through the generations, without needing to sell it for IHT.

Inheritance Tax and Income Tax are not the only taxes that need to be considered. A gift is also a disposal for Capital Gains Tax purposes and, unless a specific rule or relief applies, it is normally treated as taking place at market value. If the property has not been your only or main residence throughout your ownership, there could be Capital Gains Tax to pay even though no money has changed hands. The donor would therefore need to find the cash to pay this tax charge, alongside gifting the property. This is more likely to be relevant where the property is a holiday home, a second property or has been used for another purpose during the period of ownership.

The recipient also acquires the property at the value used for the gift. Their own future Capital Gains Tax position will depend on how they use the property and what happens to its value. But it could result in more Capital Gains Tax being paid on eventual sale than if the donor retained the property until death. This is another reason why a decision that appears to save Inheritance Tax should not be considered in isolation.

Stamp Duty Land Tax is charged on the consideration provided for the property. Usually, consideration is based on the agreed price paid for the property. However, in circumstances that no cash or other assets are changing hands, SDLT could still be payable. Where there is a mortgage on the property, and the acquirer of the property agrees to take on the liability of the mortgage as part of the transfer, the amount of mortgage is used as the consideration value and SDLT could be payable by the acquirer.

An effective gift will mean a genuine transfer of ownership. Once the property has been given away, the donor cannot assume that they will be able to reverse the decision or dictate what happens to it later. Even where the relationship with the recipient is strong, circumstances may change. A divorce, bankruptcy or death could bring other people into the picture and the property may be affected by a financial settlement, creditor claim, or the terms of the recipient’s will.

Some of these risks could be managed by gifting the property into trust, rather than directly to an individual. However, this has a number of other tax consequences, including the potential for periodic Inheritance Tax charges every ten years.

There are also practical questions. Who will pay for repairs and insurance? Can the property be sold if the donor later wants to move? What happens if the recipient needs their share of the value? These points need to be agreed and documented before ownership changes, rather than left for the family to resolve later.

Some people view the equity in their home as a backup against the possible cost of future care. Gifting the property may remove that safety net. It does not necessarily mean that the local authority will ignore the property either. If it decides that reducing the assets available to meet care costs was a significant reason for the transfer, it may treat the person as still having the asset when assessing what they should contribute.

There is no simple seven-year cut-off for this assessment. The timing, the donor’s health and care needs, their reasons for making the gift and any established pattern of estate planning can all be relevant. A genuine Inheritance Tax objective may support the rationale, but it should be evidenced and the donor must still retain enough resources to meet their own needs.

For married couples and civil partners, it is common for the home to pass to the survivor on first death. This will usually be exempt from Inheritance Tax and any unused Residence Nil Rate Band may be transferable. However, that does not mean transferring everything to the survivor is always the best outcome. If the survivor’s estate is likely to exceed the £2million threshold at which the Residence Nil Rate Band is reduced, some or all of the transferred allowance may provide no benefit on second death.

In the right circumstances, leaving a qualifying share of the home to direct descendants on first death could use the Residence Nil Rate Band while it is available. This needs careful Will planning because the tax position must be balanced against the surviving person’s security, their right to remain in the home and the flexibility to move later.

If the main objective is to keep the home in the family, removing the property from the estate is not the only answer. Life assurance can provide a lump sum to help meet the expected Inheritance Tax bill. Where the policy is held under an appropriate trust, the proceeds can normally be kept outside the insured person’s estate and may be available without waiting for probate.

This can reduce the pressure on executors to raise money from other assets or sell the home. The trade-off is the cost of cover, which will depend on age, health and the type of policy selected. Premiums also need to remain affordable, so insurance should be assessed alongside the wider estate plan rather than treated as a stand-alone solution. Insurance premiums could be more cost-effective than paying rent on the home, or the tax payable on the rental income by the recipient.

There can be more scope for planning where the donor and recipient genuinely share the property and each contributes to the household. In some circumstances, continued occupation may not amount to a reservation of benefit if the arrangements fit within a specific exception. However, simply adding another person to the title or asking them to move in will not, by itself, make the gift effective.

The facts matter, including how ownership is divided, who pays the household costs and whether the arrangement reflects how the family actually lives. Legal and tax advice should be taken before relying on this route.