Revelations made by the media in January 2025 certainly make for interesting reading. They reported that HM Revenue & Customs (HMRC) received a record £6.3 billion in Inheritance Tax (IHT) between 5 April 2024 and 31 December 2024.
This means that receipts for IHT – said to be the most unpopular tax in Britain – rose by more than 10% when compared to the same period the year before. That said, this may not be that surprising when you remember that the nil-rate band (NRB) has remained static since 2009.
As the NRB is the amount you’re allowed to have in your estate before IHT is charged, the fact it has not increased in more than 15 years could have significant implications for your estate. If the value of your property, investments or other assets have increased while the NRB has remained the same, your estate’s exposure to the tax could now be significantly higher.
Worse still, the NRB has been frozen until April 2030 and your pension pot could become liable to IHT after April 2027. As such, your estate’s exposure to the tax could skyrocket in the future.
With this in mind, you may be considering gifting your home in a bid to reduce the value of your estate, and with it, your IHT liability, which is typically charged at 40%.
If this is something you’re contemplating you’ll need to be extremely careful, as gifting your home carries risk. Read on to find out more.
You’re allowed to give certain amounts of money away
If you reduce the value of your estate your IHT liability will drop. If you can reduce it to below your NRB allowance, then you will typically negate any exposure to the tax.
As alluded to above, the NRB will remain at between £325,000 and £1 million until 2030. The amount you’re allowed to have in your estate that’s free of IHT liability typically depends on whether you’re married and if you plan to leave your home to your children.
In the 2024/25 tax year, you’re allowed to make gifts to reduce the value of your estate, which include:
- £3,000 to one person or split between several
- unlimited gifts of £250 per person, provided you have not used another allowance on the same person
- £1,000 wedding gift to anyone, a £2,500 wedding gift to grandchildren or great-grandchildren, or a £5,000 wedding gift to your children
- gifts of any amount from regular monthly income as long as it doesn’t reduce your standard of living.
You can also gift larger amounts using Potentially Exempt Transfers (PET). These allow you to leave unlimited amounts to anyone you like. For the gift to fall outside of your estate you need to live for seven years after making it, otherwise it could become liable to IHT.
Your home could be your household’s most valuable asset
As property is often one of the most valuable assets a household owns, gifting your home could significantly reduce your estate’s value, and with it, any exposure to IHT. Better still, you can gift your home using the PET rules.
If this is something you’re considering, it’s important to understand the Gift with Reservation Rules. If you don’t and inadvertently fall foul of them, your loved ones may face an unexpected and costly IHT demand when you die.
Any gift you make must be unconditional to fall outside of your estate
If you gift your home to someone, you cannot then benefit from the property in any way. In other words, the gift must be unconditional, meaning you cannot continue to live in the property, or take an income from it once it’s been passed to the beneficiary.
If you do, the gift will be classed as a ‘gift with reservation of benefit’ by HMRC. This means your home will still be liable to IHT when you pass away.
In theory, if you pay full market rent to the beneficiary while you remain in the home, it may mean your gift is unconditional. That said, according to This is Money, HMRC has frequently and successfully challenged the claim and charged IHT.
There is another important risk to consider as well. If you remain in your home and pay full market rent, the beneficiary has the right to sell the property. If they do, you will be powerless to stop the sale and will have to move out, regardless of whether you have somewhere else to live or not.
Get in touch
As you can see, gifting your home should not be something that you take lightly. Indeed, it should only be done after speaking to a financial adviser and legal professional, who can explain the risks associated with doing so.
Furthermore, they can confirm whether gifting your home is the best option for you. At AFH, all our advisers are qualified in estate planning and can help you to navigate the complicated world of IHT mitigation, creating a will and trusts.
This means they can help you understand whether gifting your home is the right action for you. If you’re looking to arrange a no obligation meeting with one of our advisers, please call us on 0333 010 0008 as we’d be happy to help.
Tuesday 4 March 2025