Can I Transfer My Home to My Children to Avoid Inheritance Tax

At Towerstone, we provide specialist Inheritance Tax accountancy services for families and executors. We have written this article to explain how gifting a home is treated for Inheritance Tax and what risks apply, helping you make informed decisions.

This is one of the most common questions I am asked and in my opinion it is also one of the most dangerous areas of inheritance tax planning if handled badly. From experience many people hear about someone transferring their house to their children and assume it is a simple and effective way to avoid inheritance tax. In reality it is rarely that straightforward and in many cases it creates more problems than it solves.

I completely understand why this question comes up so often. For most families the home is the single largest asset they own. House prices in the UK have risen dramatically over the last few decades and many people now find themselves asset rich but cash poor. The idea that a large portion of the family home could be lost to inheritance tax feels unfair especially when the intention is simply to pass it on to children.

In this article I will explain whether you can transfer your home to your children to avoid inheritance tax and more importantly whether you should. I will cover how inheritance tax treats lifetime gifts of property, the gift with reservation of benefit rules, the seven year rule, capital gains tax issues, care fees considerations, and the real world risks I have seen clients face. Everything here is based on UK rules and practical experience rather than theory.

Why People Consider Transferring Their Home

From experience people usually raise this idea for one or more of the following reasons:

They want to reduce or eliminate inheritance tax

They want certainty that the home will pass to their children

They want to avoid the home being sold after death

They have heard it is what others are doing

In my opinion the first motivation is understandable but the others often stem from fear or misinformation. Inheritance tax planning should never be driven by panic or hearsay.

How Inheritance Tax Normally Applies to a Home

To understand whether transferring your home works you first need to understand how inheritance tax treats property.

When someone dies the value of their home is included in their estate. If the total estate exceeds the available allowances inheritance tax may be payable at 40 percent on the excess.

For many families the key allowances are:

The standard nil rate band of £325,000

The residence nil rate band of up to £175,000

Transferable allowances between spouses or civil partners

In many cases a married couple can pass a home worth up to £1 million to their children without any inheritance tax. From experience a surprising number of people who worry about inheritance tax would not actually pay it under the current rules.

This is why in my opinion inheritance tax planning should always start with a full calculation rather than assumptions.

The Basic Idea Behind Transferring the Home

The logic behind transferring a home to children is usually based on the seven year rule. The idea is that if you give an asset away during your lifetime and survive for seven years it falls outside your estate for inheritance tax purposes.

On the surface this seems simple. Transfer the house to your children now survive seven years and the house is no longer subject to inheritance tax.

From experience this is where people get into trouble because property is treated very differently from cash or investments.

The Gift With Reservation of Benefit Rules

The single biggest issue with transferring your home to your children is the gift with reservation of benefit rules.

In simple terms if you give something away but continue to benefit from it HMRC treats it as if you never gave it away at all.

If you transfer your home to your children but continue to live in it rent free HMRC will treat the property as still forming part of your estate. The seven year rule does not help you in this situation.

From experience this catches out more people than any other inheritance tax rule. They believe the transfer has worked because the legal ownership has changed but for tax purposes nothing has changed.

To avoid the gift with reservation rules you would need to:

Pay a full market rent to your children

Ensure the arrangement is properly documented

Accept that the rent is taxable income for your children

Continue paying the rent for the rest of your life

In my opinion very few people fully consider the long term implications of this. Paying rent on your own home can feel emotionally and financially uncomfortable and the rent must genuinely reflect market rates.

Paying Rent and Its Practical Consequences

Even where people are willing to pay rent there are further issues to consider.

From experience these include:

The rent increases your children’s taxable income

The rent may push children into higher tax bands

The arrangement must be reviewed regularly

Any lapse can invalidate the planning

In my opinion this approach is rarely attractive unless the family has taken advice and fully understands the consequences.

Capital Gains Tax Problems for Children

Another major issue is capital gains tax.

If you transfer your home to your children during your lifetime there is no capital gains tax for you if the property has always been your main residence. Principal private residence relief usually applies.

However for your children the position is very different.

When your children eventually sell the property they may face capital gains tax on any increase in value from the date of transfer to the date of sale. They will not benefit from principal private residence relief unless they live in the property as their own home.

From experience this can create a significant tax bill which often exceeds any inheritance tax saved.

In my opinion many people overlook this entirely when considering lifetime transfers of property.

Loss of Control and Security

Transferring your home to your children also means giving up ownership and control.

From experience this raises several risks:

Your children could divorce and the property could be treated as a matrimonial asset

Your children could face financial difficulties

The property could be subject to creditor claims

Family relationships can change over time

Once the property is transferred it legally belongs to your children. You cannot simply reverse the decision if circumstances change.

In my opinion this loss of control is one of the biggest non tax risks and it should never be underestimated.

Care Fees and Deprivation of Assets

Many people ask whether transferring their home will protect it from care fees. This is often linked to inheritance tax planning but the two are governed by very different rules.

Local authorities assess assets when determining eligibility for means tested care support. If they believe assets were deliberately given away to avoid care fees they can treat the person as still owning them. This is known as deprivation of assets.

From experience transferring a home to children is one of the most common triggers for deprivation arguments. There is no fixed time limit like the seven year rule. Local authorities look at intent rather than timing.

In my opinion relying on property transfers to avoid care fees is extremely risky and often unsuccessful.

The Seven Year Rule and Property Transfers

It is important to be clear that the seven year rule does apply to property transfers but only if the gift is not caught by the gift with reservation rules.

If you transfer your home and genuinely move out and do not benefit from it again then the seven year rule can apply.

From experience this is rarely practical. Most people are not willing or able to give away their home and then live elsewhere permanently.

This is why in my opinion property is one of the least suitable assets for lifetime gifting.

Using Trusts to Transfer a Home

Some people consider using trusts to transfer their home while retaining some control.

From experience this area is complex and often misunderstood.

Most transfers of residential property into trust are immediately chargeable for inheritance tax if the value exceeds the nil rate band. There may also be ongoing inheritance tax charges every ten years.

In addition the gift with reservation rules and other anti avoidance provisions may still apply depending on how the trust is structured.

In my opinion trusts can play a role in some estate planning situations but they are not a simple solution for avoiding inheritance tax on the family home.

Alternative and Often Better Planning Options

From experience there are usually better options than transferring the home outright.

These include:

Making full use of the residence nil rate band

Ensuring wills are structured efficiently

Using lifetime gifts of other assets

Preserving pensions which usually sit outside the estate

Considering downsizing strategies

In my opinion inheritance tax planning works best when it is holistic rather than focused on one asset.

Downsizing and the Residence Nil Rate Band

One common concern is that downsizing will lose the residence nil rate band. In many cases this is not true.

The rules allow a downsizing addition which preserves the allowance where a qualifying home has been sold and the proceeds are passed to direct descendants.

From experience this provides flexibility and reassurance for people who want to move later in life without damaging their inheritance tax position.

When Transferring the Home Might Be Appropriate

Although I am cautious about property transfers there are situations where they may be appropriate.

From experience this can include:

Where the parent no longer lives in the property

Where the property is already effectively owned by children

Where the family has taken full professional advice

Where the risks are fully understood and accepted

In my opinion these cases are the exception rather than the rule.

Common Mistakes I See in Practice

Over the years I have seen many people make costly mistakes including:

Transferring property without advice

Ignoring the gift with reservation rules

Failing to consider capital gains tax

Assuming the seven year rule solves everything

Underestimating family and financial risks

In my opinion these mistakes usually arise from well intentioned planning based on incomplete information.

What I Usually Recommend From Experience

When clients ask me about transferring their home I usually recommend starting with a full review of their position.

This includes:

Calculating the actual inheritance tax exposure

Reviewing wills and ownership structures

Assessing available allowances

Considering alternative assets for gifting

Reviewing pensions and other excluded assets

In many cases clients discover that drastic action is unnecessary.

Key Takeaways

So can you transfer your home to your children to avoid inheritance tax. Technically yes but in practice it is rarely the best solution.

In my opinion transferring the family home is one of the most misunderstood and risky inheritance tax strategies in the UK. The gift with reservation rules capital gains tax exposure loss of control and care fee implications often outweigh any potential inheritance tax saving.

From experience the most effective inheritance tax planning is usually quieter and less dramatic. It involves understanding allowances using pensions effectively structuring wills properly and making sensible lifetime gifts of assets that are easier to give away.

If there is one message I would leave you with it is this. Your home is not just a tax asset. It is also your security your stability and often your emotional anchor. Any decision to give it away should be made with clarity full understanding and proper advice rather than fear of inheritance tax alone.

If you would like to explore related Inheritance Tax guidance, you may find Can I use my spouse’s nil rate band and Can my spouse or partner inherit my estate tax free useful. For broader inheritance tax guidance, visit our inheritance tax hub.