If you’re a parent thinking about passing your home on to your children, it’s only natural to wonder how to do it in the most tax-efficient way.
You might have heard about the “seven-year rule” or gifting property during your lifetime, but how does that work in practice? Is it really possible to gift your house tax-free?
Here’s what you need to know before making any decisions about transferring property to your children.
Gifting Property in the UK: The Basics
In theory, you can gift your house to your children at any time. But whether it’s tax-free depends on how you structure the gift, and whether you continue to live in the property.
Under current UK inheritance tax (IHT) rules, if you give away your home and live for at least seven years after the gift, it may fall outside your estate and no IHT will be due.
This is known as the “seven-year rule.” However, it’s not quite that simple.
What Counts as a ‘Gift’ for Inheritance Tax?
For a gift to be recognised by HMRC, you must give away ownership and benefit. In other words, if you continue to live in the home without paying full market rent, it’s classed as a “gift with reservation of benefit.”
This means that for IHT purposes, HMRC will treat the house as still belonging to you, even though it’s legally in someone else’s name. The full value of the property will be added back into your estate when you die and could be taxed at up to 40%.
To avoid this, you’d need to pay a commercial rent to your children and prove you no longer benefit from the property in any way.
Legal and Financial Risks to Consider
Gifting your home might reduce your IHT bill, but it can also raise other complications:
Capital Gains Tax (CGT)
If the property you’re gifting isn’t your main residence (for example, if it’s a buy-to-let or holiday home) you may be liable for Capital Gains Tax (CGT) when you transfer ownership.
CGT is charged on the increase in the property’s value since you acquired it. Even though you’re not selling the property for cash, HMRC treats the gift as a disposal at market value. This means you could face a sizeable tax bill at the point of gifting.
Main residences are usually exempt from Capital Gains Tax, but if you’ve lived elsewhere or let out the home at any time, a partial charge may still apply. A tax adviser can help you calculate the potential liability and plan accordingly.
Care fee implications
If you gift your house and later apply for means-tested care, your local authority may investigate your financial history. If they believe the gift was made to reduce your assets and qualify for support, they can treat it as “deprivation of assets.”
In this case, the council could still include the value of the home in their financial assessment, meaning you’d be expected to pay for your care as if you still owned it. This applies regardless of how many years have passed since the gift was made, there is no fixed time limit on deprivation of assets rules.
If care fees are a potential concern, it’s especially important to weigh up whether gifting your home is the right move.
Security of living arrangements
Once your home is no longer legally yours, you give up control, and that comes with risks. If your child (or whoever receives the property) were to divorce, pass away, fall into debt, or become bankrupt, your former home could be caught up in legal proceedings or claimed by creditors.
Even in less extreme cases, your right to remain in the property is no longer guaranteed unless a formal legal agreement is in place — something many families overlook.
If you’re still living in the home you’ve gifted, it’s crucial to have written agreements in place that clarify your rights and expectations, such as a tenancy agreement or declaration of trust.
Planning Ahead with Flying Colours
These risks don’t mean gifting is off the table, but they highlight the need for professional advice before you act.
Whether you’re hoping to reduce inheritance tax or simply want to secure your family’s future, gifting your home could be part of your strategy. But the rules are complex, and mistakes can be costly.
At Flying Colours, we help families explore all the options, from gifting or setting up a trust, to planning through your will, to make sure your wishes are carried out tax-efficiently and with confidence.
Join Our Free Inheritance Tax Webinar
Want to learn more about how to pass on your home and other assets tax-efficiently? Join our expert-led webinar on IHT planning this June. We’ll cover the key rules around property gifts, how the seven-year rule works, and your options for passing on wealth while protecting your own needs.
Book your place at the webinar now or speak to a Flying Colours adviser for one-to-one estate planning support.