Now the leaves from Autumn’s Budget have all but settled, many are shivering at the possible inheritance tax (IHT) bill their estates or their families’ estates may face.
By way of reminder, the Government made three major announcements regarding the IHT regime. Very broadly:
- From April 2026: there will be a £1 million cap applied to the value of assets against which 100% agricultural and business property relief from inheritance tax can be claimed. Qualifying assets above this threshold will benefit from a reduced 50% relief.
- From April 2027: IHT will apply to all transferable pension wealth.
- The £325,000 nil-rate band and £175,000 residence nil-rate band rates have been frozen until 2029/30.
Whilst the finer details are yet to be published, the broader brushstrokes we have already paint a clear picture: More estates will pay more IHT. It is unsurprising then, that people are looking at their assets and considering ways they can mitigate their potential liability.
The family home is likely to be one of the most valuable assets in your estate. This begs the question: “Can I gift the house to my children now to avoid paying IHT on it?”
Ostensibly a significant sum would be subtracted from the IHT equation. Sadly, this is no silver bullet. Playing with the family property brings a plethora of potential problems, including:
- Such a gift (if effective) is likely to be classed as a Potentially Exempt Transfer (known as a PET). This means that the value of the gift will be subject to some degree of IHT if you were to die within 7 years of making it. If you were to die within 3 years of making the gift, the value of the gift would be taxable (subject to any available nil-rate band) at the full 40% (with the rate tapering each year thereafter).
- You will also need to be mindful of the Gift with Reservation of Benefit rules. For IHT purposes, transferring title of your property is not necessarily enough to make a valid gift. Put simply, if you continue to derive a benefit from the property without paying full market value for the benefit you are continuing to receive (e.g. you continue to live there rent-free) after the gift, it will be treated as ineffective for IHT purposes.
- Tax issues aside, giving away your property leaves you especially vulnerable to changes in personal circumstances (and not just your own). As with so many things, all may look well on a sunny day but when it rains, it pours. If you gift your property to your children, and they divorce, that property could form part of the matrimonial pot to be divided between them and their former spouse. This could mean your property needing to be sold. Bankruptcies and fallings-out can also cause significant problems.
- Between 2021 and 2023, the average cost of a care home in the UK rose by 19%. As the population continues to live longer with more complex care needs, this trend is unlikely to change. Gifting your home, or a share in your home, limits your options in respect of downsizing, which is a common strategy to release funds to pay for care needs. Worse still, local councils are permitted to ignore gifts for the purposes of means testing if they deem such a gift to be a deliberate deprivation of assets.
In conclusion, gifting your main residence or a share in it to mitigate a possible IHT liability can have severe unintended consequences. If you are contemplating making a substantial gift, it is important you seek professional advice to determine the most appropriate options available to you.
Versions of this article appeared in This is Money, Mail Online, WhatsNew2day & British Bulletin.