Inheritance Tax threshold
If your total estate (including your home) is worth more than the Inheritance Tax (IHT) allowance (up to £475,000 in 2019-20 in the UK), the government will take 40% of the value of the estate in excess of the available threshold in tax, reducing the amount that goes to beneficiaries.
One exception would be if you previously inherited the assets of your deceased spouse or civil partner, and they had not used all of their own IHT allowance. In that case you may have inherited some or all of your spouse’s or civil partner’s allowance, granting you an IHT allowance of up to £950,000. This is called transfer of the nil-rate band.
Read the Which? Money guide to Inheritance Tax, which explains rates and thresholds in more detail, as well as the rules for married couples and civil partners. You can also use the handy Which? Inheritance Tax calculator to work out how much tax may be due on your estate.
Gifting a home
One way to avoid inheritance tax could be to give away your property before you die, for example to a child or another relative or friend. It can also be tempting to consider doing this as a way to reduce your assets, to help you become eligible for local authority care funding in later life.
But it’s very important to be aware of the strict guidelines on giving away property. If you do give away a property, this gift will be examined during a financial assessment for care. It will also be looked at for the purposes of inheritance tax if you die within seven years.
Some key rules to be aware of:
- If you move out of the house and live for another seven years after gifting it (no matter what it’s worth), it will not be included in your estate for the purposes of Inheritance Tax.
- If you want to give away your property but continue living in it, you’ll need to be able to demonstrate that you pay a market rent to the new owner and contribute to the household bills.
- If you die within 7 years of giving away all or part of your property, your home will be treated as a gift and there may be Inheritance Tax due on some or all of its value.
Sharing a home
If you give 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.
For more tips on how to avoid the financial and legal pitfalls of sharing a home, read our article Sharing a home: financial and legal considerations.
Gifts with strings attached
If you give your home to your children with conditions attached to it, or continue to benefit from the home by living in the property, this is known as a ‘gift with reservation of benefit’. This means that the gift will still be included as part of your estate for Inheritance Tax purposes when you die, even if you live for seven years after making the gift.
You could make social visits to the home that you gave away and stay for short periods. But there are guidelines as to how frequent the visits can be without the home again becoming a ‘gift with reservation of benefit’.
Gifting money or other assets
It is not only property that is covered by strict rules when it comes to giving gifts to family or friends. If you give away large sums of money or valuable possessions, these could be counted as part of your assets if you seek financial support with the cost of care, or as part of your estate after you die.
Read more in our article Gifting assets: what are the rules?
We explain the rules of gifting assets and transferring property, including the deliberate deprivation of assets.
A guide to the implications of gifting assets or property, including information about Capital Gains Tax and trusts.
There are practical and emotional aspects to consider before inviting an older family member to move in with you.