The looming question for many homeowners is how to manage potential inheritance tax (IHT) liabilities as the government introduces changes to the tax rules.

One option that often arises is whether gifting the family home to children could reduce the burden of inheritance tax.

While this might sound like an easy solution, it’s far more complex and fraught with potential risks.

Recent Changes to Inheritance Tax Rules

In the recent Autumn Budget, several key changes were made to the inheritance tax regime, signaling that more estates may face higher tax bills.

Here are the major announcements:

Changes in Relief Caps: Starting from April 2026, there will be a £1 million cap on assets eligible for full agricultural and business property relief, with reduced relief on assets above this threshold.
Pension Wealth Taxation: From April 2027, inheritance tax will apply to all transferable pension wealth.
Freezing of Tax Thresholds: The £325,000 nil-rate band and £175,000 residence nil-rate band will be frozen until 2029/30.

These changes suggest that more estates will likely be affected by inheritance tax, leaving many homeowners wondering if gifting their family home can help reduce the potential tax burden.

Is Gifting Your Home a Good Idea?

While gifting the family home may seem like an appealing strategy to reduce inheritance tax, it’s important to understand that there are significant risks involved:

Potentially Exempt Transfer (PET)

When you gift your home, it may be classified as a Potentially Exempt Transfer (PET), which means the gift could still be subject to inheritance tax if you pass away within seven years of making the gift.

The tax rate is 40% if you die within three years, and it tapers down for each year after.

This means that if you don’t live long enough after making the gift, your heirs could face a hefty tax bill.

Gift with Reservation of Benefit

Another major consideration is the “Gift with Reservation of Benefit” rule. Even if you transfer ownership of the home, if you continue to benefit from it—such as living there rent-free—the gift may not be valid for inheritance tax purposes. This could result in the gift being ignored for tax calculations, leaving your estate liable for inheritance tax anyway.

Family and Financial Issues

Gifting property to your children can also lead to personal complications.

If your child faces divorce, bankruptcy, or a falling-out with family members, the property may become part of legal proceedings or asset divisions.

In the worst-case scenario, you could end up having your child’s ex-spouse as a landlord, or the property may need to be sold.

The Impact of Care Costs

As the cost of long-term care continues to rise, gifting your home may limit your ability to downsize in the future to fund potential care needs.

Additionally, local councils may consider gifts made within seven years as deliberate deprivation of assets when assessing your eligibility for care home funding, potentially disregarding the gift for means testing purposes.

The Bottom Line: Seek Professional Advice

While gifting your home to children may appear to be a straightforward way to avoid inheritance tax, it can have serious unintended consequences.

The complex nature of inheritance tax rules, combined with potential personal and financial risks, makes it essential to consult with a professional advisor before making such a decision.

Inheritance Tax Overview

Inheritance tax is charged at 40% on estates that exceed the tax-free thresholds.

For individuals, the threshold is £325,000, and for married couples or civil partners, it doubles to £650,000.

In addition, a residence nil-rate band of £175,000 per person (£350,000 for couples) applies when leaving a home to direct descendants, potentially raising the tax-free allowance to £1 million.

However, this allowance begins to phase out for estates valued above £2 million, disappearing entirely by £2.3 million.

These thresholds are frozen until 2030, which means more estates could face inheritance tax as property values increase.

If you’re considering gifting your home or have questions about how to manage your inheritance tax, it’s crucial to seek professional guidance to ensure that your actions align with your financial goals.

This article was published on TDPel Media. Thanks for reading!

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