If I give £425k to my son to buy a house for me to live in rent free can I avoid inheritance tax AND care bills?
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I am 61 and about to start the ball rolling on moving house to a cheaper property which will mean I will be mortgage free.
I am looking to retire by 68 and now with pension funds being taxable from 2027 I am concerned about an inheritance tax bill for my only son.
Currently I will have around £425,000 to invest in a new property and by retirement over £500,000 in a pension fund.
I am not married so my son is my only heir.
I am thinking about if I gave him the £425,000 and he used it to buy a house for me to live in rent free, would this avoid the usual reservation of benefit rule and simply mean the cash is subject to the seven year rule?
I am aware of the second home Stamp Duty Land Tax and it being subject to capital gains tax, which is something I will have to model financially in deciding whether to go ahead or not.
But by using this method, would it be successful in (subject to the seven year rule) this falling outside of my estate and potentially for calculation purposes for care costs should I need them in the future?
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New home: Should I give my son the money to buy somewhere for me to live rent free
Tanya Jefferies, of This is Money, replies: Giving away your own home to avoid inheritance tax, care fees or both is a topic that comes up again and again.
You have come up with another twist, in that you intend to move and want to give the proceeds of your house sale to your son who would buy you a new home.
However, there are a number of practical and financial difficulties involved in handing ownership of an existing or a future home to your children.
These deter most people once they have fully explored them.
You should also assume the authorities - whether HMRC, or your local council in respect of care fees - have already thought of any and all ways people might come up with to avoid their obligations, and that they can and will thwart such efforts.
Luckily there are many legitimate ways to reduce your estate for inheritance tax purposes - spending your money and making no-strings gifts being the easiest. Read our guide to cutting inheritance tax bills.
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When it comes to who is responsible for paying care fees, there is no time limit on how far back your local council can look into attempts to transfer money or other assets to avoid them.
It has powers to still count whatever you gave away when it makes financial assessments, as if you had never done so.
We asked a experienced financial planning expert to look in more depth at the implications of what you propose below.
Nick Nesbitt, partner and head of private client at Forvis Mazars, replies: This is a question that we see regularly in our conversations with clients.
It can take many different forms but, in essence, it revolves around seeking to reduce one’s exposure to inheritance tax whilst also reducing the risk of assets being lost to significant care needs in later life.
These are two distinct issues, so let me first tackle them separately. Nothing in what follows represents personal financial advice, but will hopefully provide some useful general pointers for people with pension and property assets facing such dilemmas.
Protecting assets against inheritance tax
Starting with the inheritance position, you have correctly identified that, with the introduction of IHT on pension assets from April 2027, you will see a significant increase in your potential IHT liability.
The main way to reduce that liability is to remove one of your two main assets – your pension fund or your property wealth – from your estate.
This would likely bring your estate back within the £500,000 IHT-free limit, given that you could expect to have both the £325,000 nil rate band and £175,000 residence nil rate band available to your estate on death.
Looking at your pension fund first, in retirement you will need to choose how to generate an income from your £500,000 pension fund.
This will either take the form of income drawdown, where you retain the fund and simply draw off a chosen level of income, or an annuity, where you hand over your fund to an insurer and they provide a guaranteed income for life.
Nick Nesbitt: The main way to reduce IHT liability is to remove one of your two main assets – your pension or your property – from your estate
Importantly, depending on how much you will need in retirement, both of these options are likely to lead to the depletion of your pension funds and therefore your eventual IHT liability may not be as significant as it currently seems.
Regarding your property wealth, gifting capital that is then used to buy a property for your use is likely to be seen as a gift with reservation of benefit by HMRC and therefore would not be effective for IHT purposes.
In this scenario, your son may legally own the property but it would be treated as part of your estate on death and IHT would become due on its value.
You could navigate this by paying him a market rent for living in the property but this will naturally increase your expenditure needs in retirement and place more strain on your pension assets to meet those needs.
Children who come to own property in this way can also face taxes – extra stamp duty on second homes, capital gains tax – which need to be thought about too.
For me, the most important consideration here is a non-financial one – do you really want to give up ownership of your home just as you have got to that point of security of being mortgage-free?
Whilst I’m sure you have a strong relationship with your son, living in a house owned by someone else has its risks (divorce, death, bankruptcy, relationship conflict) and these need to be considered very carefully before any planning is done with one’s home.
Funding care in later life
Turning to care costs, gifting away assets can be effective for reducing one’s need to fund their own care in the future. However, there are again a number of issues to be aware of here.
Deliberate deprivation of assets: When a financial assessment is made by the local authority, if they feel that you have deliberately deprived yourself of assets to avoid paying for care, they can include the gifted assets in your assessment (regardless of the fact you no longer own them).
This is quite a grey area - in other words, what is deliberate deprivation versus what is a genuine gift - but one that we think will develop over the coming years as the burden of care costs on the state increases.
Threshold for removing yourself from self-funding is very low: You have to have capital of less than £23,250 to start relying on the state and, whilst this may be possible to achieve, it would leave you with minimal personal reserves to rely on in retirement.
Your potential future care needs: Do you want to be fully beholden to the state for your care decisions in later life?
This may not lead to the outcomes that you and your son want in later life.
Also, remember that as the rules currently stand, if you need care at home then the value of your home is usually excluded from any financial assessment.
Giving up ownership of your home
Bringing the above together, I would encourage you to think very carefully before effectively transferring the ownership of your home to your son.
Whilst this may seem somewhat a 'silver bullet' from both an IHT and care costs perspective, it is fraught with both technical issues and significant risks.
Given your relatively young age, it hard to project your long-term needs and therefore hard to be confident about depriving yourself of assets or committing to paying a rent for the remainder of your life.
If IHT is a real concern for you, then taking out some form of life insurance may represent a more straightforward, and potentially cheaper, option for the short-to-medium term.
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