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Inheritance Tax when passing on property

For Inheritance Tax purposes, giving your home away is treated as making a gift. The rules about passing on property are complicated, so it's a good idea to seek legal advice.

There are two things about gifts to be aware of when passing on property.

Seven-year rule

You can make an outright gift of your home to someone, no matter what it's worth, and it will be exempt from Inheritance Tax if you live for seven years after making the gift. This is known as a Potentially Exempt Transfer.

Gifts that you continue to benefit from

If you give your home to your children with conditions attached to it, or if you continue to benefit from the home yourself, this is known as a 'gift with reservation of benefit' and the gift won't be exempt from Inheritance Tax, even if you live for seven years afterwards.

• Gifts that are exempt from Inheritance Tax

Giving your home away and moving out of it

You can make social visits and stay for short periods in the home you give away, but there are guidelines as to how frequent the visits can be without the home becoming a 'gift with reservation of benefit'.

Giving your home away and continuing to live in it

You can continue to live in your home as your primary residence after giving it away, provided you pay a market rent to the new owner. Bear in mind that the new owner may have to pay Income Tax on the rent you pay them.

If you don't pay a market rent, the gift will be considered a 'gift with reservation of benefit' and the house may be subject to Inheritance Tax.

• Tax on rental income - an overview

Selling your home and giving the money to your children

If you sell your home and give the money to your children, the gift won't be included in your estate for Inheritance Tax purposes, provided you live for seven years after you make the gift.

However, if you sell your home, give the money to your children and then move into their home - whether this is into a granny annexe they've made for you with the money or a room in a house they have purchased - there could be Income Tax implications. You may be classed as living in a pre-owned asset if you don't pay the market rent.

If both you and your children sell your homes, pool your money and buy a new home as joint owners to live in together, the part belonging to you will be considered part of your estate for Inheritance Tax purposes.

If you don't make equal contributions to the purchase, or don't occupy the same share of the property as you purchased, you may have to pay Income Tax as your share may be classed as a pre-owned asset. See the link below for more details about pre-owned assets.

• More about Income Tax and pre-owned assets Opens new window

If you give your home to your children and they move in with you

If you give your home to your children and they move in with you, the gift will be treated as a 'gift with reservation of benefit' and the home will still be subject to Inheritance Tax.

However, if you give half of your home to your children, they move in with you and you share bills jointly, the half that you give them won't be treated as part of your estate for Inheritance Tax purposes as long as you live for seven years after making the gift.

Capital Gains Tax on a home you give away

As long as the home you give away is your main home, Capital Gains Tax won't be payable.

However, if you give away a second home, Capital Gains Tax may be payable if the property has increased in value between when you first owned it and when you gave it away.

The person you give the home to may also have to pay Capital Gains Tax if they make a profit when they sell, give away or exchange - 'dispose of' - the home, unless it's their main home.

• Capital Gains Tax relief on your own home Opens new window

Ways of owning property

There are different legal ways that you can own your home in England, Wales and Northern Ireland:

• sole tenancy - you personally own the home 100 per cent
• joint tenancy - you own the home jointly and equally with one or more people and your share passes automatically to the other joint owners
• tenants in common - you own a property with one or more people but each share doesn't have to be equal and you can give away your share however you want to

The law is different in Scotland.

Leaving your home in your will

If you and your spouse or civil partner own your home as joint tenants, the surviving spouse or civil partner will automatically inherit the home and there will be no Inheritance Tax to pay on the property when the first partner dies.

If you own a property as tenants in common with another person, you each own a portion of the property. You can pass your portion on to your children when you die. Dividing your property between your spouse and grown-up children in this way reduces the future size of the taxable estate when your surviving spouse dies.

It is a good idea to discuss the implications of changing the way you own your home(s) with a solicitor if your estate is worth more than the Inheritance Tax threshold. You'll find some links below to professional organisations - though not all professionals are registered with them.

• Find a solicitor on the Law Society of England and Wales website Opens new window

• Find a solicitor - the Law Society of Northern Ireland Opens new window

• Find a solicitor - the Law Society of Scotland Opens new window

• Get help from the Society of Trust and Estate Practitioners (STEP) website Opens new window

More useful links

• How to value a share in joint property

Useful contacts

• Probate and Inheritance Tax Helpline