Can we just gift the house now and avoid inheritance tax later?

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When it comes to passing on wealth—especially property—many famalies ask the same question. If only it were that simple.

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In this article, we break down the tax rules, explore the risks, and highlight smarter alternatives that UK families can consider.

The Plan: Hand Over the Home, Save on Tax?

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Let’s say your parents own a home worth £1.5 million, with no mortgage. They’re thinking about transferring it to you and your sibling now, rather than waiting until it becomes part of their estate.

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They’ve read about the £1 million tax-free inheritance allowance for couples—made up of the standard £325,000 nil-rate band per person, plus a £175,000 residence nil-rate band each for direct descendants.

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Sounds like they should be in the clear, right?

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Not quite. With a property value of £1.5 million, they’re now £500,000 over the tax-free threshold, and unless careful planning is done, their estate could face a significant inheritance tax bill.

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A Quick Breakdown of the Numbers

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Let’s crunch some basic figures:

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• Total estate value: £1,530,000 (house + £30,000 in other assets)

• Tax-free allowance for a couple: £1,000,000

• Taxable estate: £530,000

• IHT rate: 40%

• Potential IHT bill: £530,000 × 40% = £212,000

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That’s a far cry from the earlier estimate of £40,000 on a £1.1 million estate. At this property value, IHT becomes a serious issue—and one worth planning for.

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Why Gifting the House While Living There Doesn’t Work (Without Caveats)

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Here’s the catch: if your parents transfer the house to you and your sibling but continue living in it rent-free, HMRC sees this as a “gift with reservation of benefit.”

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Translation: it still counts as part of their estate, regardless of how long they live.

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The only way to make the gift effective for IHT purposes is if:

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1. Your parents move out entirely, or

2. They pay you and your sibling full market rent every month

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But paying rent isn’t so simple:

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• It could affect your parents’ financial lifestyle

• You’d have to declare the rental income and pay income tax

• The property might appreciate, and you’d be exposed to capital gains tax (CGT) when you sell it

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So, what looks like a simple inheritance tax dodge actually opens a can of tax worms.

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Capital Gains Tax: The Hidden Sting

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Let’s say you do accept the gift and let your parents live there (either with rent or not). You now legally own a high-value property—but not your primary residence.

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When you eventually sell the home (after your parents pass or move out), you’ll likely owe capital gains tax on any increase in value from the date of the gift.

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In contrast, if your parents keep the home until they pass, the value is “stepped up” to market value at death—meaning no CGT is owed on gains during their lifetime.

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So, a gift now could mean a large CGT bill later, wiping out any IHT savings.

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More Than Just a Tax Issue: The Emotional and Legal Risks

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Gifting a home isn't just about money—it also means giving up control of their biggest asset. Consider these real-world risks:

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• If you or your sibling divorce or go bankrupt, the house could become a contested asset

• If your parents later need long-term care, the gift could be viewed as deprivation of assets, and still counted when calculating care fees

• Managing the home becomes your legal responsibility—repairs, insurance, and disputes

• Charging your own parents rent could lead to awkward or strained relationships

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In short, gifting the property doesn’t just trigger tax issues—it has serious implications for everyone involved.

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Smarter Alternatives to Reduce Inheritance Tax

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Instead of handing over the house, consider these more flexible, tax-efficient strategies:

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1. Downsizing and Gifting the Excess

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Selling the £1.5 million home and moving to something smaller can release hundreds of thousands of pounds, which can then be gifted (triggering the seven-year rule) or used in more tax-savvy ways.

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2. Regular Gifts from Income

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If your parents have surplus income, they can gift it regularly—immediately exempt from IHT if it doesn’t reduce their standard of living.

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3. Update the Wills

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Wills should be written in a way that ensures both nil-rate bands and residence nil-rate bands are fully used. This alone could save hundreds of thousands.

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4. Life Insurance in Trust

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A life insurance policy, written in trust, can be used to cover any future IHT liability—without adding to the estate’s value.

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5. Equity Release or Secured Loan

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Releasing equity can provide a tax-efficient way to pass on wealth without giving up ownership or creating risky financial situations.

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Conclusion: It’s Complicated—But It Can Be Managed

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If your parents own a home worth £1.5 million, they’re well above the current inheritance tax threshold—and that means some thoughtful estate planning is essential.

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But gifting the house while they continue to live in it is rarely the best solution. Between inheritance tax, capital gains tax, and income tax on rent—not to mention the emotional strain—it’s a move that often causes more harm than good.

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Instead, look at strategies that:

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• Preserve flexibility

• Minimise tax exposure

• Keep family dynamics healthy

• Prepare for future care or lifestyle needs

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And above all, seek professional advice. Getting your estate plan right could save your family six figures—and a lot of stress.

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Have more questions or need assistance? Contact us!