A couple's query about gifting their £550,000 home to their daughter, who has been living with them for five years, touches on complex inheritance tax (IHT) planning. While the daughter's cohabitation might seem to simplify matters, experts explain that straightforward gifting without IHT implications is not guaranteed. The primary concern revolves around 'gift with reservation' rules, designed to prevent individuals from transferring assets while retaining the benefits of ownership.
If a property is gifted to a child, but the parents continue to live in it as before, HM Revenue & Customs (HMRC) may still consider the property part of the estate for IHT purposes. However, the situation differs when the recipient child already lives in the property as their home, and both generations continue to occupy it together. In such cases, HMRC may accept that the arrangement is not automatically a gift with reservation, provided there is a genuine change in ownership.
Seven-Year Rule and Overall Estate Value
Beyond the 'gift with reservation' rules, the seven-year rule is a critical factor. A gift of a home is typically a Potentially Exempt Transfer (PET). If both parents survive for seven years after making the gift, its value may fall outside their estates for IHT. However, if either parent dies within that seven-year period, the gifted value could still be subject to IHT. For example, a couple's combined assets, including their home (£550,000), a shop property (£400,000), and shares (£70,000), amount to approximately £1.02 million. This total, before accounting for savings, pensions, or other investments, could potentially fall within available IHT allowances for married couples leaving assets to direct descendants. These allowances can include two nil-rate bands of £325,000 each and two residence nil-rate bands of up to £175,000 each, totaling up to £1 million. Therefore, gifting the house now might not yield the expected significant IHT savings and could introduce other tax complications.
Broader Estate Planning Considerations
The commercial property, valued at £400,000, also warrants careful consideration within the broader estate plan. Gifting commercial property during a lifetime can trigger capital gains tax, even if IHT savings are eventually realized. Effective estate planning involves balancing various taxes, not just IHT in isolation. Proper documentation, including professional valuations and clear records of ownership and occupancy, is crucial for any lifetime gifts. Seeking advice from a solicitor or specialist estate-planning adviser is strongly recommended before transferring property to ensure the gift is structured correctly and to avoid potential capital gains tax liabilities or other complications. The Financial Conduct Authority does not regulate tax and estate planning.