Q&A: My home is my biggest asset, can I sell it to my kids to avoid inheritance tax?

Question:

“If I sell my home to my children whilst im still alive will it be removed from my estate for inheritance tax purposes?

Can I sell the house to them at a price that works fo both parties and then some point in the future, I can gift the cash back to the children whilst im alive, if I wish?”

If only it was a simple as this! In reality, HM Revenue and Customs will see right through this, and will consider the “sale” to your children and the subsequent return of funds to them as tax evasion and your property will still be included in your estate for inheritancce tax purposes.

In 1986, legislation was introduced to avoid individuals making gifts with strings attached, called the Gifts with Reservation (GWR) rules. The rules were designed to combat instances where individuals seeking to transfer property outside of their estate whilst continuing to derive benefit from it. In your case, selling the property to your children and presuming you also continue to live in it after the sale, and returning the money paid over time to them. On that basis, in the event of your death, the house will still form part of your estate.

And it is not just property where the GWR rules apply. Any asset you give away, but still benefit from it, falls foul of the GWR rules and the asset will still form part of your estate for inheritance tax purposes.

If you are still keen to follow through, one option is to gift the property to your children in your lifetime, and pay commerical rent whilst you are alive and still living in the property. The obvious downfall of this is that you have given away one of your largest assets that you can no longer rely on personally, which is not hugely appealing to many of us, never mind consdiering the risks associated with married children who split ownership of assets with their married partner. There is also the risk of children getting divorced for excample, and the property may be sold and the as part of the divorce settlement. This is one example where unforseen risks could mean you could become homeless as a result of gifitng your home in your lifetime and losing control of one of your largest, if not the largest, asset you own.

Also consider the upfront costs associated with gifting your home to your children. The change in ownership on the deeds of the property is perceived as a sale for tax purposes, and stamp duty will be liable as a result of the ownership transfer.

It is complicated, but in very broad terms, if you are born in the UK of British parents, being resident outside the UK does not always mean a person loses their UK domicile of origin. Often, to lose a domicile of origin a person must sever all ties with their original country and, for instance, no longer own assets in that country.

Remember your inheritance tax allowances mean that as a married couple, you each have yuor £325,000 nil rate band, plus the residence nil-rate band of £175,000 each, making £1m of allowances.

If you also have other assets, such as investments, that take you over this threshold, then if you are likely to live at least another seven years, you have the option to gift these assets to your children in your lifetime. If you live beyond seven years from the date of the gift, it is viewed as a valid gift, and will redue your overall estate for IHT purposes.