Putting your home into your child’s name early to reduce inheritance tax could backfire. Here are the risks to weigh up

I’m concerned my son may face a sizeable inheritance tax bill on my home when I die and he becomes the owner.

I’ve been told that gifts made at least seven years before someone dies are free from inheritance tax. I’m in good health at the moment — could I give him my home now, hope I live for seven years, and leave him with no tax to pay on the property when I die?

J.S., via email

Samantha Gibson, senior wealth planner at Canaccord Wealth, replies: “This is a common question. More and more families are being hit by inheritance tax bills and want to do whatever they can to reduce them.

“However, we would not usually recommend using your main home as part of an inheritance tax plan because the risks are significant, as I’ll explain.

“If you transferred your home into your son’s name, he would become the sole owner from the date of transfer. He would have full legal ownership and, provided you survive seven years, it would no longer form part of your estate for inheritance tax purposes.

“If you were to die within that seven-year period, the gift would fail — meaning the value at the time you gave it to your son would be brought back into your estate for inheritance tax calculations.

“Everyone can pass on up to £325,000 free of inheritance tax, or up to £500,000 if it is a family home. Spouses can combine allowances and pass on up to £1 million. Anything above those allowances is taxed at 40 per cent.

“If you die within seven years and you have used up your allowances, the tax rate is reduced on a sliding scale from 40 per cent to zero — for example, to 32 per cent if you die within three to four years of making the gift, and to 24 per cent if it is four to five years.

“For the gift to be free of inheritance tax, you must not continue to benefit from it — otherwise HMRC will regard it as not having been gifted at all.

“This is called a gift with reservation of benefit, and the property could still be treated as part of your estate when inheritance tax is worked out.

“If you want to keep living there, you would need to pay a market rent, and this would have to be arranged properly.

“Detailed records, tenancy agreements, annual reviews, formal landlord insurance and rental management fees would all help show that this is a genuine gift.

“On top of the solicitor’s fees for transferring the property, which can be paid by either party, your son would also have to pay tax on any rental income he receives.

“That could have further consequences for his own tax position, and we would recommend that he gets advice.

“If your son currently receives child benefit, council benefits or is close to moving into a higher tax band, for example, this could affect his tax affairs significantly and may result in him paying tax at a higher rate.

“He would need to file a tax return every year, which could create extra administration and costs for him.

“Because your son would own the home, if he were to divorce or become bankrupt, the property could be at risk of a forced sale.

“If your son is the legal owner, he can do whatever he wants with the property whenever he wants. He could sell it at any time, and you would have no guarantee that you could continue living there.

“If there were a family dispute or falling out, it could create major stress for everyone involved.

“In time, there is also a risk that the council could require the house to be sold to cover care costs if you need care later on.

“Your local council could regard the transfer as ‘deprivation of assets’ — in other words, as an attempt to give the home away to avoid selling it to pay for care home fees.

“There is no fixed rule for how many years before care the property must have been given away. It is decided case by case and can vary between councils.

“Before deciding to give away your home, please think about the emotional impact and the potential problems that could arise.

“Government rules could also change in future, and because this is not something that can easily be undone, you should think carefully about every possible scenario before going ahead.

“This is an extremely complex area, and we would always advise people to seek suitable guidance from their financial planner.”

• If you have a pressing money question for the experts, please use the email address below and include as much detail as possible, along with your contact information. [email protected]

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