Can I Gift My House to My Children and Still Live in It In the UK?
For many families, their home is their most valuable asset. It’s also often the main cause of a large inheritance tax liability. In the UK, inheritance tax (IHT) is charged at 40% on the value of your estate over the £325,000 nil rate band.
If you leave your main home to a child or grandchild then you could also benefit from the residence nil rate band, currently an extra £175,000. However, with rising property prices, many estates are still over the £500,000 exemption.
At Borealis Finacnial Planning, we are often asked by people about gifting their house to their children to get rid of their inheritance tax liability. However, they still want to live in their home. Below we explore the options.
Gifting your home while continuing living in it is known as a ‘gift with reservation of benefit’. This means that you have given up legal ownership of your property but are still benefiting from it.
However, most people are not aware that HMRC has strict rules to stop people simply giving away assets to avoid tax while still using them. If you continue to live in the house without paying full market rent, HMRC will still count it as part of your estate when you die. This means your beneficiaries will still need to pay the full inheritance tax bill.
How can I gift my house and continue living in it?
Option 1: Pay market rent to your children
If you gift your house to your children and pay them full market rent then after seven years the house would be outside of your estate.
The rent you pay must be independently assessed and you must keep all evidence and a rental agreement. Your children need to pay income tax on the rental income.
Option 1: Set up a trust
Some people put their property into trust while continuing to live there. However, the rules around this are complex and many people are often caught out by the ‘gifting with reservation’ rules meaning that the inheritance tax is still charged.
Risks of gifting your house to your children
Once you have gifted your home to your children then it becomes their asset and could be lost if they get divorced or face bankruptcy. They could also choose to sell the home at any time as you have lose all control over it.
The loss of control and the risk that HMRC may still count the home inside of your estate is very high.
Alternatives to gifting your home
If gifting your house feels too risky or complicated, other ways to reduce inheritance tax include:
· Using your annual £3,000 gift allowance or making small regular gifts out of income.
· Taking out a life insurance policy written in trust to cover any inheritance tax liability.
· Set up a trust using other assets
Inheritance tax planning is a highly complex area but there are many solutions that can help you to reduce your liability that do not involve potentially risking your home.
Book a no-obligation meeting with a financial adviser now to find out your options
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
Trusts are not regulated by the Financial Conduct Authority.
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