It may seem like a simple way to avoid inheritance tax or future care home costs, but gifting your home to your children is often one of the most legally and financially damaging moves you can make.
What starts as well-intentioned estate planning can quickly unravel into unintended tax bills, care fees, and family complications.
Approximate Reading Time: 4 minutes
Topics Discussed:
- Legal and tax risks of transferring your home to your children.
- Alternatives to consider if the transfer has already been made.
Why the Seven-Year Rule Isn’t Enough
Gifting your home to your children might seem like a clever way to reduce your inheritance tax (IHT) bill.
However, if you continue to live in the property without paying full market rent, HMRC will treat this as a “gift with reservation of benefit.”
In short, the property remains part of your estate for tax purposes, even if legally owned by your children.
This nullifies the tax advantage and exposes your estate to the full 40% IHT rate on its value.
Some suggest paying market rent as a workaround, but:
- This rent is taxable income for your children.
- Over time, the tax they pay may outweigh any IHT savings.
- You lose control of your home while continuing to fund its occupation.
The Care Fees Fallacy
Another common reason for transferring property is to avoid care home assessments. But local authorities are vigilant.
If the timing or circumstances suggest you made the gift to deliberately avoid paying care fees, the transfer can be disregarded under deprivation of assets rules.
You could find yourself:
- In financial limbo: with neither the asset nor the protection.
- Still liable for full care costs.
- Without the legal right to reside in the property.
A Costly Oversight on CGT
While a main residence is exempt from Capital Gains Tax (CGT), this protection does not extend to your children once the property is in their name.
Case Study: Debbie’s Dilemma
Debbie transfers her home (originally bought for £5,000) to her children, Christine and Miles, when it’s worth £600,000. She continues to live there. Years later, Christine and Miles sell it for £900,000.
- Because it’s not their main residence, the £300,000 gain is taxable.
- At 28% CGT, that’s an £84,000 tax bill: a cost that could’ve been avoided had Debbie retained ownership and passed it on via her will.
Probate vs. Pitfalls
Some parents believe that putting the house in their children’s names now will simplify inheritance later. But this strategy often creates more problems than it solves:
- Loss of CGT exemption.
- Risk of the property being affected by your child’s divorce, debts, or bankruptcy.
- No legal right to remain if the relationship breaks down.
In effect, you trade long-term financial protection for short-term administrative convenience, and often at great cost.
Already Transferred? Consider a Bare Trust
If you’ve already transferred your home, a bare trust may provide a legal remedy.
This allows the legal ownership to remain with the child, but the beneficial ownership stays with you.
Case Study: Alan & Patricia
Alan and Patricia transfer their home to their daughter, Stephanie. But they execute a deed of bare trust confirming that Stephanie holds the property for their benefit.
- This preserves CGT protections.
- Maintains the property in their estate for IHT purposes—preventing misinterpretation by HMRC.
- Avoids complications in probate, since beneficial ownership remains clear.
Bare trusts must be properly drafted and timed to be legally valid. Professional advice is essential.
What Should You Do Instead?
1. Understand the Tax Landscape
Be clear on the implications of CGT, IHT, SDLT, and income tax if considering any transfer of property.
2. Explore Legally Sound Alternatives
- Consider a professionally drafted will with lifetime planning options.
- Look into life interest trusts or right of residence clauses.
- Discuss lasting powers of attorney and probate planning to reduce administrative burdens.
3. Seek Professional Advice
Every decision should be based on expert legal and tax analysis. Mistakes are hard to reverse—getting it right the first time is crucial.
Summary
Transferring your home to your children while you continue living in it may seem practical, but it is fraught with legal and tax consequences.
From CGT and IHT to care fee challenges and probate confusion, this move often backfires.
At Help Me Legal, our solicitors are here to help you safeguard your property and legacy with informed, compliant estate planning strategies.
Contact Help Me Legal today at 01772 282768, fill in our contact form here, or reach out via our 24 hour WhatsApp at +447816848188.