Gifting a home
There are a number of reasons why you might think about giving away your property before you die – for example, to your children, another relative or a friend.
Two typical aims are:
- to avoid inheritance tax;
- to reduce the value of your assets to help you qualify for local authority care funding in later life.
It’s 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 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.
- 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.
What is the inheritance tax threshold?
The standard inheritance tax (IHT) allowance is £325,000 for everyone in the UK (2020-21). If the value of your estate is greater than this amount when you die, the government will take 40% of the excess value in tax, reducing the amount that goes to beneficiaries.
However, if you’re leaving the family home to your children or other family members, there is an extra property allowance of £175,000 in 2020-21. This means you can potentially leave assets (including your home) worth up to £500,000, without IHT being applied.
What’s more, if your spouse or civil partner dies before you, any of their IHT allowance that is unused can be passed on to you. In this situation, you can benefit from an IHT allowance of up to £1m (2020-21). This is called a ‘transfer of the nil-rate band’.
Visit Which? Money for detailed guidance on inheritance tax rates and thresholds. You’ll also find a handy Inheritance Tax calculator to work out how much tax will be due on your estate.
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’.
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.
Gifting a home to avoid care costs
You might think that transferring ownership of your property to a family member may help you qualify for state-funded care in later life. However, there are complex rules to be aware of, and local authorities may take the value of your property into account even if you have transferred it to someone else.
When a local authority carries out a financial assessment to determine how much you should pay towards the cost of your care, it will ask you about previously-owned assets, not just those that are owned currently. If the local authority believes you intentionally disposed of a property in order to avoid paying for social care, it may regard this as a ‘deliberate deprivation of assets’.
In that case, the value of the property would be taken into account when the council assesses your ability to pay for care. So, you could end up having to pay for your care, despite no longer having a house to fund those costs.
The council will consider whether you could have reasonably known that you might need care at the time you made the gift. Read more about what what is, and is not, considered a deliberate deprivation of assets.
Download our guide for more tips on paying for care
Our free guide to Paying for care in later life has more straightforward advice on how to pay for care. The guide covers the main care options, how much they typically cost and how to find out if you are eligible for financial support. And if you have to pay for some or all of your own care, the guide has lots of tips on how to juggle your finances to cover the costs.
The guide is free to download.
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.
Equity release can unlock funds to help pay for home care, but it’s not suitable for everyone. Find the pros & cons.
What is a Power of Attorney and why should you set one up? We also explain about Lasting Power of Attorney.