How to give away a house (and cut inheritance tax)

The Office for Budget Responsibility expects IHT receipts to bring in around £7bn in 2022-23, rising to £8.4bn by 2027-28.

The Telegraph can suggest some ways to limit the damage. This includes more use of pension funds, and claiming the residence nil-rate band, introduced incidentally by Osborne in an attempt to honour part of his earlier pledge.

In practice, the two largest assets we are likely to own are our home and our pension. There was understandable excitement in the March 2023 Budget announcement that the pension lifetime allowance tax charge was being abolished. 

Because pension funds do not count as part of your estate for IHT purposes this opened up the prospect of making larger pension contributions, subject to the increased £60,000 annual allowance, thereby increasing scope for drawing a larger tax free lump sum and keeping the balance out of the IHT net.

I fear that it may not be as simple as that. Firstly, of course, if we have a Labour government after the next election they have vowed to bring back the lifetime allowance charge. 

Secondly, you cannot be sure that the IHT advantages of pension funds will survive until your demise. In addition the tax free pension lump sum itself could be at risk. 

It has been locked at 25pc of the current £1.073m lifetime allowance, or £268,275. In my view this could remain frozen so that the dirty work of reducing it is performed stealthily through inflation.

What about the family home? 

You can leave it to your children or grandchildren in your will and the estate will be taxed less the extra family home allowance. However, what happens if you give the property to your children in your lifetime, hoping to live for a further seven years and thus avoid IHT?

How to gift a house

This can create a major problem if you continue to occupy the house. 

As a consequence of the “reservation of benefit” rules the property will typically continue to be in your estate for IHT purposes. 

In addition, the property will cease to qualify for the private residence capital gains tax exemption and the “base cost” will not be raised to market value on your death, as would otherwise be the case.

However, there are circumstances where a gift of the home can be effective. 

The reservation of benefit rules will not apply if you pay your children a full market rent to stay in what is then their property. 

This rent will potentially be caught for income tax but it may not be a problem if your child has a low income. 

Clearly you must leave yourself with enough to live on comfortably and remember that the seven year rule counts backwards from death, so rent will need to be paid for as long as you are living there or until your death. 

I recognise that many readers will be horrified at the prospect of giving away the roof over their head, and good family relationships in this are clearly vital.

Co-ownership is often overlooked but in the right circumstances can offer a large IHT saving. 

For example, suppose your elderly mother is now living on her own in the family home. She could gift half her house to you on the understanding that you will live with her part of the time and pay your share of the expenses. 

There would be no requirement for her to pay you rent and there would be no reservation of benefit.

On her death, assuming seven years had gone by, she would only own half the house and this would be valued at a discount – typically 15pc for IHT purposes. 

You would need to have real physical occupation of the property but it would only need to be part time, such as a night or two a week or perhaps holidays and weekends. 

It need not become your main home. You would also have to have a key and full rights of access. Another consideration is that extra council tax might apply. 

If your mother subsequently had to move into a care home there is no reservation of benefit and her CGT private residence exemption would continue to apply for three years. 

You should take appropriate legal advice before proceeding.

This article was first published on April 5 2023 and has since been updated.

Mike was director of accountants Grant Thornton but is now retired. Send him questions to taxhacks@telegraph.co.uk