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

At Towerstone, we provide specialist Inheritance Tax accountancy services for families and executors. We have written this article to explain gift with reservation rules, helping you make informed decisions.

This is one of the most common questions I am asked as a chartered accountant and in my opinion it is also one of the most dangerous areas of misunderstanding in UK tax and estate planning. From experience, people rarely ask this question out of curiosity. They usually ask it because they are worried about inheritance tax, care fees, or both.

The idea often sounds simple. If I give my house to my children but keep living in it, surely it is no longer mine for tax purposes. In reality, the UK tax system is very alive to this type of planning and the consequences can be far more severe than people expect.

In this article, I am going to explain exactly what happens if you give away your home but continue to live there. I will cover inheritance tax, capital gains tax, care fees, and practical risks such as loss of control and family disputes. I will also explain why this arrangement so often fails and what safer alternatives may exist.

Everything here is based on real UK rules and from experience advising real families who have either considered this route or already taken it and then needed help unwinding the damage.

Why People Consider Giving Away Their Home

In my experience, people usually consider giving away their home for one or more of the following reasons:

• To reduce inheritance tax

• To protect the property from care fees

• To help children financially

• To simplify their estate

• To act on advice from friends or online sources

In my opinion, the intention is almost always understandable. The problem is that the execution is often based on myths rather than law.

The Core Problem With Giving Away Your Home but Staying in It

The UK tax system focuses heavily on substance over form. In other words, it looks at what is really happening rather than what paperwork says.

If you give away your home but continue to live in it as before, HMRC is likely to say that nothing meaningful has changed.

From experience, this triggers one of the most important inheritance tax rules in the UK.

The Gift With Reservation of Benefit Rule Explained

This is the key rule that applies when you give away your home but still live there.

HM Revenue & Customs treats this as a gift with reservation of benefit.

You have given the property away on paper but you have kept the benefit of living in it.

When this rule applies:

• The property is still treated as part of your estate

• Inheritance tax applies as if the gift never happened

• The seven year rule does not work

In my opinion, this rule alone defeats most casual attempts to give away property while continuing to live there.

How HMRC Views the Situation

From experience, HMRC looks at questions such as:

• Do you still live in the property

• Do you pay a full market rent

• Do you have exclusive use

• Do you treat it as your main home

If the answer to these points suggests you still enjoy the property as before, the gift with reservation rules apply.

This guidance is set out by HM Revenue & Customs and published through GOV.UK.

Does Paying Rent Fix the Problem?

This is where many people think they have found a solution.

If I give my house away but pay rent to the new owner, surely that solves it.

In theory, paying a full market rent can remove the gift with reservation issue.

In practice, from experience, this is rarely effective.

To work properly:

• The rent must be at full market value

• It must be reviewed regularly

• It must actually be paid

• It must be declared as taxable income by the recipient

• It must continue for life

In my opinion, most people either cannot afford the rent long term or stop paying it properly. When that happens, the inheritance tax benefit collapses.

Income Tax Consequences of Paying Rent

There is also a tax cost that is often overlooked.

If you pay rent to your children:

• They must declare the rent as income

• They may pay income tax on it

• They may pay National Insurance depending on circumstances

From experience, families rarely factor this into the plan properly.

Capital Gains Tax Problems for the Recipient

Giving away your home does not just affect you. It affects the person who receives it.

If your children receive your home and it is not their main residence:

• Principal private residence relief does not apply

• Capital gains tax may be due when the property is sold

From experience, this often results in large and unexpected tax bills years later.

In my opinion, this is one of the most damaging hidden consequences of this strategy.

What Happens for Inheritance Tax When You Die?

If the gift with reservation rules apply:

• The house is treated as part of your estate

• Inheritance tax is calculated as if you still owned it

• The seven year rule is ignored

This means that giving the house away achieved nothing for inheritance tax purposes.

From experience, families are often shocked when they discover this after death.

The Pre Owned Assets Tax Trap

Even where people think they have avoided the gift with reservation rules, another tax can appear.

This is known as the pre owned assets tax.

If you give away an asset and continue to benefit from it, you may be taxed annually on a notional rental value.

From experience, this catches people who think they have structured things cleverly.

In my opinion, this tax exists precisely to block artificial arrangements.

Care Fees and Deprivation of Assets

Many people give away their home because they are worried about paying for care.

Local authorities have their own rules, separate from inheritance tax.

If you give away your home and later need care, the council may apply deprivation of assets rules.

This means:

• They assess why the asset was given away

• They look at timing and intention

• They can treat the property as still yours

From experience, there is no fixed time limit. Even gifts made many years earlier can be challenged if avoidance of care fees was a motive.

Living in the Property After Gifting and Care Fees

If you continue living in the property rent free:

• The council is more likely to challenge the gift

• The arrangement looks artificial

• The risk of deprivation findings increases

In my opinion, giving away your home while staying in it is one of the weakest care fees strategies possible.

Loss of Control Over Your Home

Tax is not the only issue.

Once you give your home away:

• You no longer legally own it

• You have no automatic right to stay

• You are reliant on the goodwill of the new owner

From experience, even close family relationships can change over time.

In my opinion, giving away your home is one of the biggest financial risks a person can take if they still rely on that property for security.

What If the New Owner Divorces or Goes Bankrupt?

This is another area people rarely consider.

If the person you give the house to:

• Divorces

• Dies

• Goes bankrupt

• Faces legal claims

Your home could be at risk.

From experience, this has led to forced sales and family breakdowns.

What Happens If the New Owner Dies First?

If your child dies before you:

• The property becomes part of their estate

• It may pass to their spouse

• It may be exposed to their debts

In my opinion, this scenario alone should make people pause before gifting their home.

Mortgage and Legal Issues

If the property has a mortgage:

• Most lenders will not allow gifting

• Consent is required

• Terms may be breached

From experience, this often stops plans before they start.

There are also legal costs, Land Registry changes, and potential stamp duty issues depending on circumstances.

Does the Seven Year Rule Help at All?

In most cases, no.

The seven year rule only works for inheritance tax if there is no reservation of benefit.

If you continue living in the property:

• The clock does not start

• The gift never becomes effective for IHT

In my opinion, this is one of the most misunderstood aspects of inheritance tax.

Common Myths I Hear All the Time

From experience, these myths come up repeatedly:

• If I live seven years it is tax free

• Everyone does this and it works

• The council cannot look back forever

• HMRC will not notice

In my opinion, all of these are dangerous assumptions.

Are There Any Situations Where This Works?

In very limited circumstances, yes.

For example:

• You move out completely

• You pay a full market rent

• The arrangement is commercially realistic

Even then, the risks are significant and ongoing.

From experience, this is not suitable for most people.

Safer Alternatives to Consider

In my opinion, better options often include:

• Proper inheritance tax planning using allowances

• Pension based planning

• Well drafted wills

• Life interest trusts on death

• Insurance solutions

• Deferred payment agreements for care

These options are usually more robust and less risky.

The Importance of Professional Advice

This is an area where poor advice causes lasting damage.

From experience, people who act on:

• Online articles

• Friends recommendations

• Sales driven trust firms

Often end up worse off.

In my opinion, advice should always be tailored and regulated.

Emotional and Family Impact

Beyond tax, this decision affects family relationships.

From experience, unclear arrangements lead to:

• Arguments

• Resentment

• Loss of independence

• Stress in later life

In my opinion, peace of mind is just as important as tax efficiency.

Key Takeaways

Giving away your home but continuing to live in it almost never works in the way people hope.

From an inheritance tax perspective, the gift with reservation rules usually apply. From a care fees perspective, deprivation rules often undo the plan. From a personal perspective, you lose control over the one asset that provides security and stability.

In my opinion, this strategy is one of the most overused and least effective ideas in UK estate planning.

If there is one takeaway, it is this. The UK tax system is designed to tax enjoyment and benefit, not just legal ownership. If you keep living in your home, the system will usually treat it as still yours.

From experience, the best outcomes come from honest planning, early advice, and solutions that work with the rules rather than trying to sidestep them.

If you would like to explore related Inheritance Tax guidance, you may find What happens if Inheritance Tax is paid late and What happens to Inheritance Tax when someone dies without a will useful. For broader inheritance tax guidance, visit our inheritance tax hub.