How do I avoid inheritance tax on my property?

Transferring property to your children to avoid tax could backfire

Gifting property to your children to avoid inheritance tax may appear to make financial sense but Estate Planning Lawyers warn there are risks involved, including the possibility you will be forced out of your home.

Jan Atkinson,  at London law firm Osbornes Law, explains, “We often have clients in their seventies or younger come to us asking if they can transfer their property to their children in order to avoid them incurring inheritance tax costs in the future. Whilst it may appear to be a financially astute move, there are strict guidelines in place and if you plan to continue living in your home, it is likely your children will still face a tax bill, or worse, your child’s divorce or bankruptcy will see you forced to sell.”

The Inheritance Tax (IHT) allowance is £325,000 after which your beneficiaries are required to pay 40% tax on assets over that amount. If you’re leaving the family home to your children or other family members, there is an extra property allowance of £175,000 so you can potentially leave assets (including your home) worth up to £500,000 tax-free. For a married couple, this allowance can be doubled. High house prices, particularly in London and the South East can still mean IHT is payable, so many on modest incomes consider how they might avoid being pushed over the limit.

“If you die within seven years of gifting your property to your children, the estate will still be required to pay inheritance tax on the value of the house if the net estate value exceeds the available IHT allowances,” warns Jan. “If you remain living in the house despite no longer owning it, that is viewed as a ‘gift with reservation of benefit’ and will indefinitely incur tax charges unless you can prove you have paid market rent to the new owner, as well as your household bills. This could prove too expensive for many.”

If you gift half of your home to your children, who then move in and share the bills, the half that you have given away won’t be treated as part of the estate for Inheritance Tax purposes – as long as you live for seven years after making the gift and the children remain living there for the last 7 years of your life. There is, however, the additional risk that you could lose the house because of events beyond your control.

Jan explains, “If the child you have transferred your property to gets divorced, then the property will be included as one of the assets that must be apportioned between both partners so it is possible it would need to be sold.  Similarly, in a situation where your child is forced to file for bankruptcy, the property could have to be put on the market. Along with the potential for a falling out between you and your children, transferring the property could mean you find yourself with nowhere to live. Even if the financial savings look appealing, it may not be worth jeopardising the peace of mind associated with owning your own home.”

Osbornes is an award-winning London law firm with a reputation for providing outstanding legal advice to all clients across all of the firm’s departments. The firm is recognised by ‘The Times’ in the ‘Best Law Firm Guide’ 2020.

For a free confidential discussion with our teams call 020 7485 8811.

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Jan Atkinson Partner
Wills, Probate and Disputed Estates

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