What Happens If I Give Away My Home but Still Live There?

Introduction

Many people consider giving their home to their children or other family members during their lifetime as a way to reduce Inheritance Tax (IHT). However, the rules around gifting property are strict. If you give away your home but continue to live in it without paying full market rent, HMRC will treat it as if you never gave it away at all for tax purposes.

This type of arrangement is known as a “gift with reservation of benefit” (GROB). It can have significant tax consequences if not structured correctly. This article explains what happens if you give away your home but still live there, how HMRC views it, and what steps you can take to avoid problems.

Understanding the Gift with Reservation Rule

A gift with reservation of benefit occurs when you transfer an asset, such as your home, to someone else but continue to use or benefit from it as if it were still your own.

In the case of property, this could mean:

• You give your home to your children but continue living there rent free.

• You transfer ownership but keep using part of the property (for example, one floor).

• You retain some control over how the property is managed or sold.

Under HMRC’s rules, if you continue to benefit from the gifted property, it remains part of your estate for Inheritance Tax purposes even if the legal title is in someone else’s name.

Why People Gift Their Home

The main reason people gift their home is to try to reduce their estate’s value for Inheritance Tax.

Normally, if you give an asset to someone and survive for seven years, that gift is exempt from IHT under the seven-year rule. However, the rule only applies if you genuinely give up ownership and the right to benefit from the asset.

If you continue to live in the property without paying rent, HMRC will treat the gift as invalid for IHT purposes, and the property’s value will be added back into your estate when you die.

Example Scenario

Imagine Margaret gives her £500,000 home to her son in 2020 but continues living there without paying rent. She passes away in 2028.

Even though more than seven years have passed, HMRC still counts the home as part of her estate because she continued living in it rent free. The full £500,000 is included in her estate, and Inheritance Tax may be due.

If Margaret had moved out or paid full market rent after gifting the property, it would no longer have been treated as part of her estate after seven years.

When the Gift Counts for Tax Purposes

To make the gift effective for Inheritance Tax, you must:

1. Completely give up ownership and control of the home.

2. Stop benefiting from it meaning you no longer live there or use it.

Alternatively, you can still live in the property after gifting it if you pay full market rent to the new owner (usually your children).

The rent must:

• Be the same as what an unrelated tenant would pay for a similar property.

• Be paid regularly and recorded in writing, ideally through a formal tenancy agreement.

• Be declared as rental income by the recipient for Income Tax purposes.

If these conditions are met and you survive for seven years after the transfer, the property will normally fall outside your estate for IHT.

The Seven-Year Rule

If you make a valid gift (without reservation of benefit) and survive for seven years, it becomes fully exempt from Inheritance Tax.

If you die within seven years, the value of the gift is added back into your estate, but taper relief can reduce the tax due depending on how long you survived after making the gift:

Years between gift and death Percentage of full tax due

0 3 years 100%
3 4 years 80%
4 5 years 60%
5 6 years 40%
6 7 years 20%

Once seven years have passed, no Inheritance Tax is payable on the gift.

Other Tax Implications

Capital Gains Tax (CGT)

If you gift your home to someone who does not live with you, they may have to pay Capital Gains Tax in the future when they sell it. The gain will be calculated from the property’s market value at the time of the gift to the eventual sale price.

If it was your main home, you usually do not pay CGT when gifting it. However, the person receiving it may have a CGT liability when they sell.

Income Tax for Rent Payments

If you pay rent to your children after gifting the home, they must declare it as rental income on their tax return. They can deduct allowable expenses such as maintenance or insurance before calculating the tax due.

Deprivation of Assets

If you give away your home and later need long-term care, local authorities may treat the gift as deliberate deprivation of assets. This means they could still count the property’s value when assessing your ability to pay care fees.

When It Might Be Better Not to Gift Your Home

Gifting your home can create financial and legal complications. Consider carefully before transferring ownership if:

• You still need to live there and cannot afford to pay rent.

• Your relationship with the recipient might change.

• The new owner could face financial problems such as divorce or bankruptcy, which could put your home at risk.

In many cases, it may be safer to use alternative estate planning strategies, such as trusts, life insurance, or Inheritance Tax allowances.

Getting Professional Advice

Transferring property to family while continuing to live there involves complex tax and legal issues. It is important to:

• Get a professional valuation of your home.

• Take advice from an accountant, solicitor, or estate planner.

• Draw up proper documentation if rent will be paid.

• Consider how the change affects your overall tax position and future care planning.

Example of How Paying Rent Can Work

Suppose Helen gifts her £400,000 home to her daughter in 2024 but continues to live there, paying £1,500 a month in rent the same amount as the market rate.

Helen’s daughter declares the rent as income and pays Income Tax on it. Helen’s gift counts as a valid transfer for Inheritance Tax purposes. If Helen survives for seven years, the home’s value is excluded from her estate.

Although this arrangement can reduce Inheritance Tax, both parties must meet their tax obligations for it to remain effective.

Conclusion

If you give away your home but continue living in it without paying full market rent, HMRC will treat it as a gift with reservation of benefit, meaning the property remains part of your estate for Inheritance Tax. To make the gift effective, you must either move out or pay market rent to the new owner.

While gifting your home can be an effective estate planning tool, it must be done carefully to avoid unexpected tax consequences. Seeking professional advice ensures your arrangement is compliant with HMRC rules and aligns with your long-term financial goals.