Gifting the family home might seem like a straightforward way to help your children or reduce inheritance tax, but it’s rarely as simple as it appears. There are several tax traps and practical complications that can turn a well-intentioned gift into a costly mistake. Before you transfer your property, it’s vital to understand the rules around Inheritance Tax (IHT), the gift with reservation (GWR) trap, and the pre-owned assets tax (POAT).
Understanding the Key Rules
The seven-year rule is often mentioned in estate planning. If you give away your home and survive for seven years, the value of the gift can fall outside your estate for IHT purposes. However, this only works if you genuinely give up all benefit in the property. If you continue to live there without paying full market rent, the gift is caught by the GWR rules. This means the home is still treated as part of your estate for IHT, regardless of how long ago you made the gift.
Even if you avoid GWR by paying a documented full market rent, you may face the POAT charge. POAT is a yearly income tax that applies if you continue to enjoy the property after gifting it, even if you’re paying rent. The rent your children receive is taxable income for them, and the arrangement must be reviewed regularly to ensure the rent remains at market value.
If the property is mortgaged, transferring it can trigger Stamp Duty Land Tax (SDLT) for the recipient, based on the share of the debt they take on. This is often overlooked and can result in an unexpected tax bill.
Practical Options and Alternatives
If you’re determined to gift your home and continue living there, you must pay a full market rent to the new owners, with the arrangement properly documented and reviewed. This avoids GWR, but brings POAT and income tax implications for both you and your children. The children will need to declare the rent as income and pay tax on it.
Given these complications, many families find that alternative planning is more effective. For example, a will-based life interest trust allows you to protect your share of the home for your children while letting your spouse or partner continue living there. This avoids the risks of outright gifting and is less likely to be challenged by HMRC.
Examples to Illustrate the Risks
Gift without rent: Parents gift a £500,000 home to their children but continue living there rent-free. The GWR rules apply, so the home’s value remains in the parents’ estate for IHT purposes. If the parents die within seven years, there’s no tax saving.
Gift with rent: Parents gift the home and pay full market rent to their children. GWR does not apply, but POAT may arise, and the children must pay income tax on the rent received. The arrangement must be carefully managed and regularly reviewed.
Common Pitfalls
Many people underestimate the complexity of gifting property. Failing to pay market rent, not documenting the arrangement, or overlooking SDLT on a mortgaged property can all lead to unexpected tax bills. It’s also easy to forget that POAT can apply even if you think you’ve avoided GWR.
Key Takeaway
Gifting your home is rarely a simple route to tax savings. Before acting, model the effects of IHT, POAT, and SDLT, and consider whether alternative planning—such as a life interest trust in your will—might achieve your goals with fewer risks. Always keep thorough records and review arrangements regularly to stay compliant.
Disclaimer: This article is for general information only and does not constitute legal, financial or tax advice. Every estate is different, and outcomes depend on your specific circumstances. Take time to familiarise yourself with the rules and keep your paperwork up to date.