“Giving the house to my kids will save me Inheritance Tax” – or will it?

Unfortunately, it’s not quite that simple. In this briefing, associate Deanna Stephenson challenges the common misconception that giving away assets during your lifetime will ensure less IHT is payable on your death. 

Many believe that transferring their home to a family member will remove the value of the property from their estate, thus reducing the IHT payable on their death and increasing the amount passing to their beneficiaries. However, this is not necessarily the case. 

‘Unintended tax consequences and administrative difficulties’

While gifting property to family members may seem like an effective way to reduce IHT, such arrangements can often lead to unintended tax consequences and administrative difficulties for your estate and executors after your death. If you gift an asset, such as your home (or a share of it), but continue to benefit from it — for example, by continuing to live in the property after the date of the gift — this may be considered a Gift with Reservation of Benefit (GWRB).

Under the GWRB rules, the value of the property will remain part of your estate for IHT purposes, meaning no IHT saving is achieved. Additionally, such arrangements can complicate the reporting obligations of your executors, making the administration of your estate more time-consuming and potentially leading to disputes with HMRC.

To avoid these unintended consequences, it is essential that certain rules are followed. The gift of the property must be made with ‘no strings attached’. You must give up all benefit and control over the property. This includes moving out of the property or, if continuing to live there, paying full market rent to the new owner. Failure to comply with the specific requirements under the GWRB rules will eradicate the intended IHT saving and could lead to further financial and practical complications for your executors and beneficiaries. 

If the various requirements are satisfied and the gift does not fall within the GWRB rules, the standard lifetime gifting rules will still apply, and you must survive seven years from the date of the gift for the total value of the gift to fall outside your estate for IHT purposes.

As you can see, the rules surrounding lifetime gifting are complex. If you are considering estate planning, reviewing your current Will to ensure it is as tax-efficient as possible, or preparing a Will for the first time, our Private Client team is here to help.