I want to gift my child my home to beat inheritance tax: Our money expert reveals all the hidden pitfalls you need to consider – and warns you could leave your children WORSE off by giving them your house early

I’m worried my son will have a large inheritance tax bill to pay on my home when I die and he becomes the owner.

I’ve heard that gifts that are made at least seven years before someone’s death are free of inheritance tax. I’m in good health now – can I gift him my home in the hope I live for seven years and he has no tax to pay on the property when I die?

J.S., via email

Samantha Gibson, senior wealth planner at Canaccord Wealth, replies: ‘This is a common query. Growing numbers of families are facing inheritance tax bills and want to do what they can to reduce them.

‘However, we would never normally advocate using your main home as part of the IHT plan as the risks are considerable – as I’ll explain.

‘If you transferred your home into your son’s name, he would become the sole owner from the date of transfer. He would have full legal ownership and – assuming you survive seven years – it will no longer form part of your estate for IHT purposes.

‘Should you die within that seven-year period, the gift would “fail” – meaning the value at the time you gave it to your son will be brought back into your estate for the purpose of IHT calculations.

‘Everyone can pass on up to £325,000 free of inheritance tax – or up to £500,000 for a family home. Spouses can pass on allowances so they have up to a combined £1 million. Everything above these allowances is taxed at 40 per cent.

‘If you die within seven years and you have used your allowances, the tax rate will be tapered from 40 per cent to zero – for example, to 32 per cent if you die within three to four years of making the gift and to 24 per cent if it’s four to five years.

‘For the gift to be free of inheritance tax, you cannot continue to benefit from it – otherwise HMRC will consider that you have not gifted it at all.

‘This is known as a gift with “reservation of benefit” and the property could be considered part of your estate when inheritance tax is calculated.

‘If you want to continue living there, you will have to pay market rent. And this would need to be done formally.

‘Detailed records, tenancy agreements, annual reviews and formal landlord insurance, rental management company fees – all would help show that this is a qualifying gift.

‘In addition to the solicitor fees related to transferring a property – which can be paid by either party – your son will be required to pay tax on any rental income he receives.

‘This could have further implications on his personal tax situation, and we would recommend he seeks advice on this.

‘If your son currently receives child benefit, council benefits or is on the cusp of higher tax bands, for example, this could significantly impact his tax position and could result in your son paying a higher rate of tax.

‘He will be required to complete a tax return annually, and this could incur additional administration and costs for him.

‘As your son will own the home, if he were to divorce or become bankrupt, the home could be at risk of a forced sale.

‘If your son is the legal owner, he has complete freedom to do what he wants with the property when he wants. He could sell it at any time and you have no guarantee that you will be able to remain living there.

‘If there were to be a family disagreement or falling out, this could cause significant stress to all involved.

‘In time there is a risk the council could demand that the house is sold to pay for your care, should you need it in future.

‘Your local council could view the house gift as what is known as “deprivation of assets” – in other words, intentionally given away to avoid having to sell it to pay for care home fees.

‘There is no specific rule that determines how many years before you need care the property needs to have been given away. It is assessed on an individual basis and varies between councils.

‘Before deciding to give away your home, please consider the emotional impact and the potential future problems that could arise.

‘It is always possible that Government legislation will change in the future and, as this is not something that can be easily unwound, think long and hard about all the different scenarios before going ahead.

‘This is an extremely complex area and we would always recommend people seek appropriate advice from their financial planner.’

• If you have a burning money question to put to the experts, please use the following email address and include as many details as possible, as well as contact information.  money@mailonsunday.co.uk