While gifting can play an important role in inheritance tax planning, there are strict rules around how and when it works.
Discover everything you need to know about inheritance tax and giving your assets away:
When it comes to estate planning, one of the most common questions we’re asked is: “Can I avoid inheritance tax by giving away my house or my savings?”
We understand why. At first glance, it seems like a simple solution. If inheritance tax is based on the value of your estate, then surely giving assets away during your lifetime should reduce or even eliminate that tax?
Unfortunately, it’s not quite that straightforward. While gifting can play an important role in inheritance tax planning, there are strict rules around how and when it works. If those rules aren’t followed, it can lead to unexpected tax consequences, and sometimes, it can create even bigger problems for your family.
In this article, I want to explain what happens when you give away your house or your savings, and where the common pitfalls lie.
One of the first ideas people often suggest is giving their home to their children. On the surface, it sounds logical. Your children own the property, so it’s no longer part of your estate, and it seems like the problem is solved.
However, the key question to note is: are you still living in the property?
If the answer is yes, then from an inheritance tax perspective, the gift is unlikely to be effective. This is because of something called “gift with reservation of benefit”.
In simple terms, even though legal ownership has changed, you’re still benefiting from the asset by living there. As a result, the value of the property is still treated as part of your estate when you pass away. Not only does the strategy fail to reduce inheritance tax, but it can also create additional complications, which I’ll detail below.
When a property has been given away but is still counted as part of your estate, it can lead to a difficult situation.
The situation is: you no longer legally own the property, but its value is still included when calculating inheritance tax. So, how is any tax due actually paid? This creates a disconnect between ownership and responsibility, which often makes things more complicated for your executors and your family.
There’s also a loss of control to consider. Once you’ve given the property away, it no longer belongs to you. That means decisions about the property ultimately sit with the new owner.
Another aspect that’s often overlooked is the impact on the person receiving the property. If your child doesn’t live in the property themselves, it’s likely to be treated as a second property for them.
This can have several consequences:
So while the intention may be to help, the outcome can sometimes create financial disadvantages for your children.
Gifting savings is slightly more straightforward than giving away your house, but again, it depends on the circumstances. You are free to give away money during your lifetime, and in many cases, this can reduce the value of your estate for inheritance tax purposes.
However, there are two key conditions. Firstly, you may genuinely give the money away. That means you can’t continue to benefit from it in any way. Secondly, you need to consider whether you might need that money in the future.
If you give away funds that you later rely on, for example, to cover living costs or care fees, this can cause serious issues.
When you make larger gifts, they are typically treated as what’s known as “potentially exempt transfers.” This is where the 7-year rule comes into play. In simple terms:
This is why timing is so important when it comes to gifting strategies.
There’s another important consideration, particularly as we get older. If you give away assets that you still need, especially with the intention of reducing care costs, this can be challenged by your local authority. This is known as “deprivation of assets”.
For example, if you give away a large sum of money and later require long-term care, the local authority may still assess you as if you owned those assets. This means you could still be expected to contribute towards your care costs, despite no longer having access to the funds. It’s a situation we advise clients to approach very carefully.
Despite what can be challenged, gifting can absolutely still be a useful part of inheritance tax planning when done properly. It tends to work best when you’re financially secure and unlikely to need the asset, you are comfortable giving up control and benefit, and the wider impact on your family has been considered.
For example, giving away surplus savings or assets you no longer rely on can be an effective way to reduce the value of your estate over time. It needs to be done as part of a broader plan, rather than as a quick fix.
If there’s one thing to take away from this article, it’s that giving away assets isn’t a guaranteed solution to inheritance tax. In some cases, it can create more problems than it solves. That’s why we always recommend taking a step back and looking at the bigger picture. There are often more structured and reliable ways to play, which can involve:
It’s completely natural to want to reduce inheritance tax and pass as much as possible on to your loved ones. But when it comes to giving away your house or savings, the details matter. Gifting can absolutely play a role in that, but it needs to be done in the right way, at the right time, and for the right reasons.
If you’re looking for advice and careful planning, get in touch with our team at Heritage Estate Planning today.
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