Gifting property to avoid Inheritance Tax: what’s the catch?
Britain’s “most hated levy”, Inheritance tax (IHT) is a tax that typically hits families when they’re experiencing emotional turmoil and financial disarray - so it’s fair to state that it consistently stirs up some especially strong opinions.
As of March 2025, 55% of Brits consider it either very unfair to unfair, according to a YouGov survey. With the UK’s overall tax burden now at its highest level in over 70 years (according to the Institute for Fiscal Studies), it’s no surprise that many people are asking how they can reduce the amount taken from their estate - including how to gift property to circumvent this bumper earner for the Treasury.
One common question is whether you can simply “give away” your home to avoid the taxman. On the face of it, the idea seems straightforward. But in practice, it’s full of pitfalls. So, how can taxpayers minimise their IHT liability?
At the centre of this discussion is the ‘seven-year rule’. It applies to what are called ‘potentially exempt transfers’. If you gift your house, and live for another seven years, its value typically falls outside of your estate for IHT purposes.
However, if you die within those seven years, the gift may still be subject to tax depending on the figures involved. The amount of tax owed can, depending again on the figures involved, taper down the longer you live, but this taper only starts to apply if death occurs after three years from the gift.
A common mistake is thinking you can give your home to your children, continue living in it, and still escape IHT on the value of your home after seven years. This simply isn’t true. HMRC treats this as a “gift with reservation of benefit”, meaning it doesn’t count as a gift at all for IHT purposes and the value of your home is still in your estate for IHT purposes. If you want to continue living in the property after gifting it and the value fall out of your estate after seven years, you must pay a full market rent, and the arrangement must be properly documented and regularly reviewed to ensure the level of rent remains a full market rent.
It’s important to understand that gifting your home may have other unintended consequences. For example, should you need to go into care, the value of the home may still be considered part of your assets under ‘deprivation of assets’ rules and what about your security of tenure in the home. Could you be evicted in the future if the relationship with your children changes, or they face challenges such as financial difficulties or divorce. It could also trigger a Capital Gains Tax issue for your children later on if the house is eventually sold.
Frustratingly, the perennial problems surrounding IHT are often as unlikely as they are unfair. For this reason, the earlier you start planning (and there is much that can be done), the more options you’ll have, and the better chance you’ll have of avoiding unnecessary tax.
If you’re unsure whether gifting your home is the right option for you, speak to a member of Wilkin Chapman Rollits’ expert team.
Contact Paul to discuss this further.
