Recent analysis reveals a significant trend among parents who are hastily transferring ownership of their family homes to their children in an effort to sidestep hefty inheritance tax (IHT) bills. According to Land Registry figures, the number of properties being exchanged for free is projected to surge by over 45% over the coming year, reaching approximately 220,000.
This increase follows a steady rise from around 130,000 properties given away annually to about 152,000 in 2023. The trend has been further fuelled by recent changes in IHT rules introduced by Chancellor Rachel Reeves, which will soon include pensions and family businesses within its scope. Rising stamp duty bills for second property buyers, higher capital gains tax rates, and lower personal allowances—further eroded by inflation—are also contributing factors to this trend.
There are many tax traps and pitfalls where passing on the family home is involved and it is often not feasible to do so during lifetime, due to the requirement for parents to genuinely relinquish the property, in order for this IHT planning to be effective. If successfully challenged by HMRC, the property will still be considered as within the parents’ estate for IHT purposes.
With IHT typically paid at a rate of 40% on estates above the nil-rate band (NRB), currently set at £325,000, it’s not surprising that lifetime estate planning has become much more relevant in current times. The "seven-year rule" allows assets to be passed down, tax-free, if given seven years before death, with tapering rates applied to gifts over the NRB made within three to seven years before death.
Although gifting the family home, whilst continuing to live in it, is not recommended from an IHT perspective, without taking measures to ensure the parents are no longer benefitting from the property, (by for example, paying market rent for the time they spend there or co-habiting with their adult children), there are often more straightforward steps that can be taken to reduce their IHT exposure in relation to other assets in their estates.
The key, as always, is addressing estate planning needs well ahead of time, ensuring the parents are comfortable with the long-term financial implications of the options they are considering, and that they align with retirement plans and future aims.
