Can I give away my home and still live in it? Wealth expert CARLA MORRIS answers your questions on IHT

Inheritance tax rules have long been a minefield, catching out even the most prepared families. 

But major reforms announced by Chancellor Rachel Reeves during the Budget yesterday have added yet more complexities. 

There are still many legitimate ways to pass down your wealth to loved ones without paying tax. 

However, fail to abide by the strict rules and you could inadvertently land your family with an unexpected tax bill. 

As a financial planner at wealth manager RBC Brewin Dolphin, I tackle these challenges on behalf of families every day. 

Here, I answer the big questions. 

• I want my children to inherit the family home. Will they face an inheritance tax bill? 

It depends on the value of the property and what other assets you hold. 

Everyone has an inheritance tax allowance – known as the nil-rate band – of £325,000. 

That means that you can pass on wealth up to this sum without your family paying a penny of inheritance tax. Married couples can combine their allowances – and can inherit from each other without paying inheritance tax. 

That means that on the death of the second spouse, a total of £650,000 can be passed on. Then on top of that, there is a special allowance that allows you to pass on a family home to direct descendants. 

This is an additional allowance of £175,000, called the main residence nil rate band. Again, couples who are married or in a civil partnership can combine their allowance to pass on a family home worth up to £ 1 million tax free (although this allowance is reduced on estates valued at over £2 million). 

All this means that if you and your spouse own a family home together worth up to £1 million, you can pass it on to your children with no inheritance tax bill to pay. 

• My partner and I are not married, but we share kids and a family home. Will our children be able to inherit our £1 million home tax free? 

No. Couples who are married or in a civil partnership are able to pass assets to each other free of inheritance tax. 

However, couples who are not married or in a civil partnership cannot benefit from these spousal exemptions – regardless of how long they have been living together or whether or not they have children together. 

That means that the family home would only benefit from the inheritance tax allowances of one parent – amounting to £500,000. 

Anything above this would be taxed at a rate of 40 per cent. 

• Can I give my home to my family now to avoid inheritance tax – but still live in it? 

If you give your house to your family, you must live for at least a further seven years after making the gift for it to be considered outside of your estate for IHT purposes. 

However, you must make the gift unconditionally. If you benefit from the property in any way, the gift will be what is termed a ‘gift with reservation of benefit’ and as such will remain in your estate. 

That means that the property is not deemed a genuine gift because it comes with strings attached. So, if you gift your home to your children but continue to live in it, it will be treated as if it remains in your estate and may be subject to IHT when you die. 

You can get around this by paying your family full market rent to live in it. Not only this, but your family would have to pay income tax on the rent that you pay them. However, this is an area that HMRC challenges frequently and successfully. 

As an example, if you gifted your child a second home but still stayed in it regularly for your holidays, your family could be hit with a tax bill of about £117,000. 

This assumes that you own your own home and it is worth more than the £325,000 nil-rate band – or £650,000 if you’re a couple – and your second home is worth the UK average house price of £292,924. 

If you are found to have been using the home without paying your child rent, they may face a 40 per cent inheritance tax charge on the home. 

• Will the taxman really know if I give my daughter my diamond ring or hand my loved ones valuable art?

It’s not just properties and cash that count as part of your estate for inheritance tax purposes. Valuable items such as jewellery, art and furniture count too and the seven-year gifting rules apply to them just as with any other transfer of wealth. 

Therefore it is essential that you keep accurate records of what gifts you make and when so that your beneficiaries can deal with probate quickly and accurately. 

If you haven’t made any other gifts in this or the previous tax year, you can make a gift of up to £6,000 (or £12,000 if the asset is held jointly) and that will be exempt for inheritance tax purposes. 

Recording the value and date of that gift will ensure that if any queries are raised, they can be answered quickly, ensuring you, or your estate, benefit from the entitled reliefs. 

It may be tempting to think that you could hand over items without HMRC noticing and imagine that your executors could avoid declaring those gifts should you die within seven years of making them. 

However, HMRC have considerable powers to investigate estates in relation to IHT so you will not get away with dodging the rules. 

The Chancellor also announced yesterday that she was recruiting an additional 5,000 HMRC compliance staff. 

• My son wants to take over our small farm in the South West of England. Can he still inherit it tax-free? 

There are currently rules in place, known as Agricultural Property Relief (APR), which enable families to pass on farmland to the next generation free of inheritance tax. However, the Chancellor announced yesterday that the current rules will change in April 2026. 

From then, only assets worth under £1 million will receive the full relief. Assets above this will only receive 50 per cent relief, resulting in an IHT rate of 20 per cent. 

Any allowance will be applied proportionally across all the qualifying property, so you can’t pick and choose the assets to pass on using the full IHT exemption. 

• I plan to leave my family business to my two kids, will they have to pay tax on it? 

As above. The new rules on passing on family homes will also apply to those with family businesses. 

• I want to give a lot of my wealth away now while I’m still alive so that my family doesn’t have to pay inheritance tax. But I’m worried that I won’t live for another seven years. What can I do? 

Parents or grandparents wanting to gift without incurring inheritance tax can make use of the annual gifting allowance, which is currently £3,000. 

Larger gifts are either classed as ‘potentially exempt transfers’, meaning you must survive for at least seven years for them to be tax free, or ‘chargeable lifetime transfers’, which are immediately assessable to IHT. 

Also consider if perhaps making the gift and taking a chance on surviving seven years is worth the risk. If you do survive that long then the gift will be outside your estate for IHT purposes. 

If you don’t, any IHT is payable on the failed gift at 40 per cent (or perhaps less depending on the size of the gift and how long you live) and that might be the same IHT rate that would have been payable by your estate. 

Don’t forget that any assets passed to your spouse are exempt for inheritance tax. Be careful when making gifts – make sure you leave yourself enough to live off. 

• I bought shares in startups to reduce my family’s IHT bill. Have the rules changed since the Budget? 

If those shares are held on the AIM market – which is part of the London Stock Exchange for small, listed companies – they will currently qualify from business relief and are not subject to inheritance tax until April 2026. 

This applies as long you live for two years after making the investment. From that date onwards the relief will reduce to 50 per cent so the IHT bill on that portfolio will be charged at 20 per cent. 

If you have other investments that currently qualify for business relief the full exemption will also apply until April 2026 but from that point onwards the 100 per cent IHT relief will apply only to the first £1million, with the remainder receiving 50 per cent IHT relief – which amounts to an IHT rate of 20 per cent.