Tax Planning

My wife and I, 72 and 70, own our £2.5m home. Our only son, 34, is about to get married, and he and his new wife plan to move into our house later this year. The house will become the primary residence for the four of us all.

We would like to gift the house to our son. He will enter a prenuptial agreement with his future wife to keep assets in the marriage separate. What would the tax consequences of gifting the property to him be?

Would the property become exempt from Inheritance Tax (IHT) after seven years? Is there any Stamp Duty to pay? And if he lives there for seven years and then moves out, how does this affect IHT?

Abbie West-Kelsey, assistant tax manager, says:

IHT is currently charged at a rate of 40 per cent on death. Based on the current value of the property (£2.5mn), and ignoring any nil rate band thresholds that you and your wife may have, IHT of up to £1m could be due on your home.

As it stands, gifting your house to your son outright could be an effective way to reduce your exposure to the tax. The gift would be a potentially exempt transfer, and if you survived seven years from the date of making it, the transfer would then become fully exempt from IHT upon your death.

If you died within seven years of making the gift, there would be an IHT charge due. But once at least three years have passed, you start qualifying for taper relief, and IHT is charged at a reduced rate. The effective rate of IHT is 32 per cent after three years, reducing all the way to 8 per cent after six years. For example, if you died five years and two months after gifting your entire home to your son, the IHT charge of £1mn (40 per cent) would be reduced to £400,000 (an effective IHT rate of 16 per cent).

If you do wish to go down this route, you should consider making the gift as soon as possible, to start the seven-year clock. However, you should be aware of the anti-avoidance rules that may apply if a true gift is not made.

A gift is a gratuitous transfer with nil consideration or benefit. If you are benefiting from it, it cannot be a gift. These rules were introduced to ensure taxpayers cannot benefit from a property and at the same time give it away. Broadly, if you gifted the property to your son but lived in it up until your date of death, the home would still be treated as part of your estate for IHT purposes.

This article first appeared in the Investors’ Chronicle on 28 October 2024 and is reproduced with kind permission