Tax Articles
7 Things You Should Know About Giving Your Home To Your Children
Do you want to gift your home to your children?
You are permitted to give your home to your children (or another beneficiary) at any time – even if you live in it. However, if your home and your estate are worth more than the Inheritance Tax threshold (£325,000 in tax year 2010/11) there may well be tax implications.
Our guide outlines seven things you should know when considering giving your home to your children.
Seven-year rule
Giving your home away is treated (for Inheritance Tax purposes) as ‘making a gift’. When passing on property, there are two things that you should be aware of. The first is the ‘seven year rule’.
You can make an outright gift of your home to someone, irrespective of its value, and it will be exempt from Inheritance Tax if you live for seven years after making the gift. This is known as a ‘potentially exempt transfer’ (PET).
Gifts that you continue to benefit from
The second important thing to be aware of is the idea of a ‘gift with reservation of benefit’.
If you give your home to your children with conditions attached to it, or if you continue to benefit from the home yourself, this is known as a ‘gift with reservation of benefit’. In this case, the gift won’t be exempt from Inheritance Tax, even if you live for seven years afterwards.
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Giving your home to your children and moving out of it
As we have seen above, you cannot gift your home and then continue to live in it without it remaining part of your estate. You are permitted to make visits and to stay for short periods in the home that you gift, but you cannot remain permanently.
Giving your home to your children and continuing to live in it
If you gift your home to your children, you can continue to live in it as your main residence as long as you pay a market rent to the new owner. You should bear in mind that the new owner may have to pay Income Tax on the rent you pay them.
If you don’t pay a market rent, the gift will be considered a ‘gift with reservation of benefit’ and the house may be subject to Inheritance Tax.
Selling your home and giving the proceeds to your children
Instead of gifting the property to your children, you could sell your home and gift them the proceeds from the sale. In this case, the gift won’t be included in your estate for Inheritance Tax purposes, as long as you live for seven years after you make the gift.
However, if you sell your home, give the money to your children and then move into their home, there could be Income Tax implications. You may be classed as ‘living in a pre-owned asset’ if you do not pay the market rent.
Gifting your home to your children who then move in with you
If you give your home to your children and they then move in with you, the gift will be treated as a ‘gift with reservation of benefit’ and the home will still be subject to Inheritance Tax.
However, if you give half of your home to your children, they move in with you and you share bills jointly, the half that you give them won’t be treated as part of your estate for Inheritance Tax purposes as long as you live for seven years after making the gift.
Capital Gains Tax on a home you gift to your children
As long as the home you give away is your main home, Capital Gains Tax won’t be payable.
However, if you give away a second home, Capital Gains Tax may be payable if the property has increased in value between when you first owned it and when you gave it away.
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Kevin McMahon - Tuesday, October 18th, 2011
I helped my daughter buy a flat 7 years ago. She put in approx 50% deposit (£30,000), I took out a mortgage for the rest. I have since paid off the mortgage, and now want to gift the flat to my daughter (who has lived in it on her own). Which is the best way to do this. The flat originally was £60,000 and is now only valued at around £63,000.
Desmond John Whitney - Thursday, November 24th, 2011
I own my house with 6 years of mortgage left on it.
My aim is to give it to her and live in it and pay mortgage.I have been ill and wish to ensure that my daughter gets as much of its value as she can in case I get put in a home etc.
I live alone and have been in receipt of DLA, Incapacity Benefit and a small pension for the past 11 years as I have Bipolar Disorder and was told by a consultant that I have at least an 80% probability of having Aspergers Syndrome by letter in June 20011. I have thought about this for a considerable time but was unsure about what steps were required to be taken.
Many Thanks, Des Whitney
Alan Goussaert - Saturday, February 4th, 2012
When my daughter seperated from her husband, I brought a house for her and my grandchildren to live in. That was 9 years ago and I have not received any rent or financial benefit from it. In fact I have been paying the insurance on it. I would now like to gift the house to her. It cost me £126,000 and is now worth approx £160,000.
John Stephens - Saturday, March 24th, 2012
Gift with reservation of benefit: My wife died 12 years ago and since then I downsized and moved house and at the same bought another property with the proceeds to let out ( this was and still is providing an income ad I can no longer work to an accident as a pedestrian which caused a back injury) time included my two sons on the deeds thus effectively gifting two thirds of the home to them. The reasons behind this was nothing to do with IHT but to prevent any future wife (of mine) from taking all after my death and likewise in a potential divorce, protecting my estate from being unnecessarily eroded. part of home I live in
John Stephens - Saturday, March 24th, 2012
Continued/…it now appears that although the gift of two thirds of my original home (now two properties) was effectively their rightful inheritance from their mother, that my sons would now have to pay IHT because of this unfair gift with reservation of benefit rule. Is there anything I can do to mitigate this even if it means taking back what i have given into my estate? My sons could contest that I have had the burden of ‘maintaining’ these properties do where exactly is the many benefit? Why is the ruling only mitigated by paying rent instead?
malcolm - Monday, May 14th, 2012
My father signed across the title deeds of the house to me 9 years ago but continued to live in it as his till his death. I now wish to sell it. What tax do I have to pay on it.
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