Thinking of giving your home away? Think again!

Written by Peter Vassallo on 17 September 2018


We are paying more in inheritance tax (IHT) than ever before. HMRC raked in £5.2bn from death duties this year, a £3.4bn rise compared with five years ago, and growing property wealth means more and more people will be losing out to the taxman when they die.

There are a number of ways to pay less, but the complex and little-understood rules surrounding IHT result in many being caught out.

When you die, £325,000 of your estate is safe from tax, plus a further £125,000 if you are passing your home on to a direct descendant. Anything above those thresholds will be taxed at 40pc before it can be passed to your family, although certain business and agricultural assets attract valuable reliefs.

You can reduce the death duties your family will have to pay by giving them assets beforehand, thereby reducing the value of your estate. If the gift, such as a cash lump sum, is made at least seven years before you die, it will be exempt from tax. 

People often ask about the benefits of giving their properties to family members before they die to avoid the clutches of the taxman, but experts have warned that certain pitfalls could result in you paying more than you save. Many clients ask us about gifting property and ways around this, but it is an area we need to be very careful about. While it is indeed possible to give away an entire property to substantially reduce the value of your estate and therefore the amount of tax an inheritor would have to pay, the process is not as tax efficient as many would think. One little-known rule in particular can throw gifting exemptions out of the window. The rules on a “gift with reservation of benefit” (GROB) are designed to stop people giving away assets such as properties at the same time as making use of them.

These rules mean you cannot give your home to your children and continue to live there unless you are prepared to pay the market rate of rent – a rather tall order for most people in the later stages of life. The rule also applies to holiday homes so if you wanted to give away 100% of your holiday property but still use it every now and then, you would  have to pay a market rent for the length of your stay. Otherwise the taxman could deem the asset to be part of the overall estate. However there are some planning opportunities for giving away part of your holiday home where your children regularly occupy part of the property.

The tax implications of the GROB rules can be severe. For example, a widow who gave away her property in order to reduce the amount of IHT payable on her estate could inadvertently leave her son with more tax to pay than if she had done nothing at all. If she continued to live in the house after the gift was made without paying the market rate of rent, even if she died more than seven years later, the taxman could take his 40pc cut under the GROB rules.

Moreover, as the widow had made the gift during her lifetime, she would lose her £125,000 family home allowance, as the property would not have passed directly after death. Following the widow’s death, the son could also be liable to pay capital gains tax if he decided to sell the property, which could well have risen significantly in value over the years since the gift was made. Capital gains tax would apply on any money made over the annual tax-free allowance, currently £11,700, at a rate of 18pc, or 28pc for higher-rate taxpayers.