Why gifting your home during your lifetime could be a mistake

With property prices rising across the UK, the home represents the single largest asset in the estate for many families. Indeed, research reported by Zoopla (17 July 2025) shows that the average UK home increased in value by 20% between 2020 and 2025.

That being the case, it’s easy to understand why many homeowners consider gifting their property – or a share of it – to children or grandchildren during their lifetime.

You may be considering it yourself, whether to provide immediate financial support to your loved ones or ensure the home remains within the family. However, for some, the primary reason is to reduce a potential Inheritance Tax (IHT) bill.

While the intention behind the gift is understandable, executing it without careful planning could be a mistake. Here’s why, along with alternative options you might want to consider.

Transferring ownership of your residence exposes you to potential legal and financial risks

Once you gift your property, you no longer legally own it. Even if you have a verbal agreement with your family that you can stay in the home, life events could unexpectedly jeopardise your living situation.

If the person you gifted the property to faces divorce, personal bankruptcy, or dies before you, the house could quickly become an asset involved in legal proceedings. Here, the court or a creditor may force a house sale, leaving you facing unexpected eviction or forced relocation.

Complex tax rules often mean gifting your home is rarely as simple as you think

Gifting a property rarely results in the straightforward tax savings many expect. Here is what you need to consider before making a transfer:

• Gift with reservation of benefit: If you gift your home to your children but continue living there rent-free, HMRC treats this as a “gift with reservation of benefit”. The property will remain part of your taxable estate for IHT purposes upon your death, potentially rendering your original goal moot. To avoid this, you would need to pay full market rent to your children, which could then create an Income Tax liability for them as they effectively become landlords.
• Capital Gains Tax (CGT): While your primary residence is exempt from CGT under Private Residence Relief, gifting a second property or giving a home to someone who does not live there as their main residence may trigger a CGT bill on any growth in value since you bought it, even though no cash changed hands.
• Loss of the residence nil-rate band: Gifting your home during your lifetime can inadvertently complicate or reduce your eligibility for the residence nil-rate band allowance, which is up to £175,000 in 2026/27. This may allow individuals to pass a main residence to direct descendants tax-free upon death. Spouses or civil partners may pass on their unused residence nil-rate band to the surviving partner, potentially doubling their allowance. You should note that the residence nil-rate band will taper by £1 for every £2 that your net estate exceeds £2 million. If you gift your home away entirely during your lifetime and do not own a residence at death, you could forfeit this valuable allowance.

Because these rules interact in complicated ways, they can quickly trigger immediate and future tax liabilities for both you and your beneficiaries, so it’s important to approach the task with caution.

Local authorities may treat the transfer as a deliberate deprivation of assets

If you gift your home to avoid having its value included in a financial means assessment for residential care, then local authorities can investigate under the Deprivation of Assets rule.

If a council determines that your primary motive for transferring the property was to circumvent paying care fees, they still have the power to include your home’s value when calculating your care contribution. They may even seek to recover costs directly from the recipient of the gift.

Navigating these legal and tax hurdles ultimately requires caution, as an unintentional error could leave your family facing higher tax bills than if you had simply retained ownership.

There are safer alternative strategies to support your loved ones

If your goal is to help your family financially or reduce the impact of IHT on your estate, there are several safer ways to go about this task without putting your home at risk.

• Use your lifetime gifting allowances: You can gift up to £3,000 tax-free each year under your annual exemption, alongside small gifts of up to £250 per person so long as they have not benefited from other gifting allowances, without triggering an IHT bill.
• Make a potentially exempt transfer: You can gift cash, investments, or other assets outright. Provided you survive for seven years after making the gift, the value will fall outside of your taxable estate. If you do not survive for seven years, then IHT may still be reduced according to taper relief.
• Gift out of your surplus income: If you have regular surplus income that you do not need to maintain your standard of living, then you can make regular tax-free gifts that are immediately exempt from IHT, provided they are well documented.
• Use life insurance held in trust: If you are concerned about a potential IHT bill, consider putting a life insurance policy in trust to provide a dedicated, tax-free cash payout upon your death that is specifically designed to cover any IHT liability.

Exploring these structured alternatives with a financial planner means you can support your family during your lifetime while still maintaining control over your home and financial security.

This is something we can help with, so get in touch and let’s explore your options.

Please note: This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning, tax planning, or trusts.

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.