Can I gift my house to my children and still live in it to reduce IHT?

Many clients ask us about gifting their house to their children while continuing to live in it as a way to reduce the size of their estate and subsequent inheritance tax bill.

 Inheritance tax is up to 40% of the value of your estate over the nil rate band of £325,000. If you leave your primary residence to your direct descendant, then you may also be eligible for the residence nil rate band of £175,000. For married couples, this means that they can potentially shelter up to £1million from inheritance tax. However, with rising house prices, many families are still concerned about the impact of inheritance tax on their estate.

It is an option to gift your house to your child and continue to live in it – this arrangement is known as a "gift with reservation of benefit," which involves transferring ownership while continuing to reside in the property. If you are looking to do this then there are important factors and implications to consider.

Understanding the Gift with Reservation of Benefit

Gifting a house to your children while still living in it involves transferring ownership of the property but maintaining some form of benefit from its use. This commonly occurs when an individual wants to reduce the value of their estate for inheritance tax purposes while ensuring they can live in the property for the remainder of their life.

Key Considerations

Residence Rights: After gifting the property, you can establish a formal arrangement, such as a "life interest" or "occupancy rights," allowing you to continue living in the house for the rest of your life or a specified period. This legal agreement defines your rights and responsibilities as the occupant.

Tax Implications: The act of gifting a property has potential tax implications. While the value of the property would be removed from your estate for inheritance tax purposes after seven years, if you continue living in it, the property might still be considered a part of your estate upon death.

Asset Protection: Gifting a house to your children might expose the property to risks associated with their financial situations, such as bankruptcy or divorce. It's important to consider these potential risks and take necessary precautions.

Potential Legal Issues: The arrangement must be carefully documented to avoid future disputes or challenges. Legal advice and formal agreements can help ensure clarity and prevent complications among family members.

Advantages and Disadvantages

Advantages:

Inheritance Tax Planning: Gifting the property can potentially reduce the overall value of your estate for inheritance tax purposes, depending on various factors.

Control and Security: Retaining the right to live in the property provides stability and familiarity, especially for elderly individuals.

Family Involvement: It allows you to see the benefits of the gift during your lifetime, fostering family connections.

Disadvantages:

Tax Implications: There might still be tax implications even after gifting the property, impacting your estate and your beneficiaries.

Loss of Ownership Control: You will no longer have full control or ownership of the property once it's gifted, which might limit your options in the future.

Legal and Financial Risks: There could be unforeseen legal or financial risks associated with the arrangement, necessitating careful consideration and planning.

Seeking Professional Advice

Before proceeding with such arrangements, seeking advice from legal and financial professionals specializing in estate planning is crucial. They can evaluate your specific circumstances, advise on the implications, and help structure the arrangement in a manner that aligns with your goals while safeguarding your interests and those of your beneficiaries.

In conclusion, gifting a house to your children while retaining the right to live in it is a complex decision with various legal, financial, and emotional implications. It can be an effective estate planning tool, but it requires careful consideration, thorough documentation, and professional guidance to ensure it aligns with your objectives and safeguards the interests of all involved parties.

Book in a meeting with a financial adviser

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

 SJP Approved 27/10/2025