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5th June 2023

Myth busting: Inheritance Tax planning with the home

Myth busting: Inheritance Tax planning with the home
Charlotte Simm
Charlotte Simm

Some of the myths that prevail about how to reduce Inheritance Tax (IHT) payable on death are surprisingly persistent. One such myth is: 'if I change the deeds to my house into my child’s name, Inheritance Tax won’t be payable on the house when I die.' 

It is understandable how this idea could seem attractive. After all, in many cases, the home - or a share in it - is a person’s most valuable asset, produces no income and can be gifted free of Capital Gains Tax (CGT).

However, as an IHT-saving measure this generally falls in the camp of 'if something seems too good to be true, it probably is'. 

In order to remove the house from the IHT net on the death of the owner (the parent, in this example), the general rule is that it would be necessary for the parent to move out of the house entirely, retain no benefit at all from it, and survive for at least seven years from the gift (with the possibility of some IHT saving after three years, depending on the value of the gift). 

Otherwise, the gift is likely to count as a ‘gift with reservation of benefit’ (GROB), meaning that HM Revenue & Customs would treat the house as part of the parent’s estate on their death and assess it to IHT as if it had never been gifted at all.

There are, however, some circumstances in which a gift of the home to a child by a parent who remains in occupation should escape the GROB rules. These include:

  • The parent gifts the home to the child and remains in occupation but pays the child a market rent. The rent should be negotiated at arm’s length, follow normal commercial criteria, and be reviewed regularly to ensure that it remains at the market rate. In cases where the parent has the funds to pay the rent, this could work well; although some parents would find the notion of their child as their landlord to be unappealing, and there is a potential risk to the parent’s security if the relationship with their child were subsequently to deteriorate.
  • The parent gifts the home to the child, moves out and ceases to benefit from it in any way, but subsequently has to move back to the home as a result of an unforeseen and unplanned change in the parent’s circumstances (for example, they have become unable to maintain themselves through old age). This is an important social loophole, although independent living might be both parties’ preferred choice.
  • The parent gifts part of the home to the child and they then live there together. In order to ensure that the parent receives no benefit from the gift, the parent should pay a share of the running costs which is, at least, proportionate with their retained share of the property. In the right circumstances this arrangement could be a good solution, although there are comparatively few families where it would be practicable and if the child were subsequently to move out of the property the GROB rules would come into play.

Typically the most common and successful way of IHT planning with the home occurs when a parent downsizes (for instance following retirement or bereavement) and gifts some or all of the surplus sale proceeds to the child, with the parent subsequently surviving seven years. However, even this could entail potential pitfalls, for example, if the gifted cash were subsequently applied towards buying a property for the parent to occupy.

Given the complexities and risks of any planning involving the roof over one’s head and the potential tax saving at stake, any such planning should always be approached with considerable caution and appropriate professional advice sought.