Philip Sillars is a solicitor at law firm Winckworth Sherwood.
Many people are worried about the possible inheritance tax bill their estates or their families’ estates may face following changes revealed in the Autumn Budget.
One common question is whether gifting the family home to children can reduce inheritance tax - but doing this is fraught with risks.
By way of reminder, the Government made three major announcements regarding the inheritance tax regime. Broadly:
1. From April 2026: there will be a £1million cap applied to the value of assets against which 100 per cent agricultural and business property relief from inheritance tax can be claimed.
Qualifying assets above this threshold will benefit from a reduced 50 per cent relief.
2. From April 2027: inheritance tax will apply to all transferable pension wealth.
3. The £325,000 nil-rate band and £175,000 residence nil-rate band rates have been frozen until 2029/30
While the finer details are yet to be published, the broader brushstrokes we have already paint a clear picture: more estates will pay more inheritance tax.
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 inheritance tax on it?'
Ostensibly a significant sum would be subtracted from the inheritance tax equation.
Sadly, this is no silver bullet. Playing with the family property brings a plethora of potential problems.
1. 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 inheritance tax if you were to die within seven years of making it.
If you were to die within three years of making the gift, the value of the gift would be taxable (subject to any available nil-rate band) at the full 40 per cent (with the rate tapering each year thereafter).
2. You will also need to be mindful of the Gift with Reservation of Benefit rules.
For inheritance tax 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 after the gift (for example, you continue to live there rent-free), it will be treated as ineffective for inheritance tax purposes.
3. 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 one gets divorced, that property could form part of the matrimonial pot to be divided between them and their former spouse.
This could mean your child's ex becoming one of your landlords or the property needing to be sold.
Bankruptcies and fallings-out can also cause significant problems.
4. Between 2021 and 2023, the average cost of a care home in the UK rose by 19 per cent.
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 inheritance tax 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.
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