Why gifting your home during your lifetime could be a mistake

With property prices rising across the UK, thehome 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% between2020 and 2025.

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

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

While the intention behind the gift isunderstandable, 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 residenceexposes you to potential legal and financial risks

Once you gift your property, you no longerlegally own it. Even if you have a verbal agreement with your family that youcan stay in the home, life events could unexpectedly jeopardise your livingsituation.

If the person you gifted the property to facesdivorce, personal bankruptcy, or dies before you, the house could quicklybecome an asset involved in legal proceedings. Here, the court or a creditormay force a house sale, leaving you facing unexpected eviction or forcedrelocation.

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

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

·  Gift withreservation of benefit: If you giftyour home to your children but continue living there rent-free, HMRC treatsthis as a “gift with reservation of benefit”. The property will remain part ofyour taxable estate for IHT purposes upon your death, potentially renderingyour original goal moot. To avoid this, you would need to pay full market rentto your children, which could then create an Income Tax liability for them asthey effectively become landlords.

·  CapitalGains Tax (CGT): While yourprimary residence is exempt from CGT under Private Residence Relief, gifting asecond property or giving a home to someone who does not live there as theirmain residence may trigger a CGT bill on any growth in value since you boughtit, even though no cash changed hands.

·  Loss of theresidence nil-rate band: Giftingyour home during your lifetime can inadvertently complicate or reduce youreligibility for the residence nil-rate band allowance, which is up to £175,000in 2026/27. This may allow individuals to pass a main residence to directdescendants tax-free upon death. Spouses or civil partners may pass on theirunused residence nil-rate band to the surviving partner, potentially doublingtheir 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 homeaway entirely during your lifetime and do not own a residence at death, youcould forfeit this valuable allowance.

Because these rules interact in complicatedways, they can quickly trigger immediate and future tax liabilities for bothyou and your beneficiaries, so it’s important to approach the task withcaution.

Local authorities may treat the transfer as adeliberate deprivation of assets

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

If a council determines that your primarymotive for transferring the property was to circumvent paying care fees, they stillhave the power to include your home’s value when calculating your carecontribution. They may even seek to recover costs directly from the recipientof the gift.

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

There are safer alternative strategies tosupport your loved ones

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

·  Use yourlifetime 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 notbenefited from other gifting allowances, without triggering an IHT bill.

·  Make apotentially exempt transfer:You can gift cash, investments, or other assets outright. Provided you survivefor seven years after making the gift, the value will fall outside of yourtaxable estate. If you do not survive for seven years, then IHT may still bereduced according to taper relief.

·  Gift out ofyour surplus income: If you haveregular surplus income that you do not need to maintain your standard ofliving, then you can make regular tax-free gifts that are immediately exemptfrom IHT, provided they are well documented.

·  Use lifeinsurance held in trust: If you areconcerned about a potential IHT bill, consider putting a life insurance policyin trust to provide a dedicated, tax-free cash payout upon your death that isspecifically designed to cover any IHT liability.

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

This is something we can help with, so get intouch 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 ofwriting and is subject to change in the future.

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

The Financial Conduct Authority does notregulate estate planning, tax planning, or trusts.

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

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

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