We’ve had two potential clients come to us recently with the same story. They had transferred their home into their children’s names — one directly, and one via a trust. Both trying to reduce a potential inheritance tax bill and concerned over care home fees — their theory being that if they didn’t own the house, it couldn’t be used to fund their care. In both cases they were not paying their children market rent and they were still living in the property exactly as before.
I understand the thinking behind these decisions. Your house is, in most cases, your biggest asset; the associated inheritance tax could be significant, and someone has told them this is the answer. But in both cases, it had created more problems than it solved.
On the care home fees point first – whilst I am not a solicitor – Local authorities can — and do — investigate asset transfers made to avoid funding care costs. If they conclude the transfer was made deliberately to deprive yourself of assets, they can treat the property as still belonging to you when assessing what you need to contribute to care costs. There’s no fixed time limit on how far back they can look, and “I transferred it years ago” isn’t a defence if the timing suggests the transfer was made with care costs in mind. So that strategy often doesn’t work either.
On the inheritance tax side, HMRC has a concept called a “gift with reservation of benefit.” If you give something away but continue to benefit from it — living in your house rent-free, for example — HMRC treats it as if the gift never happened. The house is still in your estate when you die, which means inheritance tax applies as normal. You therefore get no IHT benefit whatsoever of transferring the property into your children’s names.
And it’s not just a rent-free occupation that catches people out. If you pay rent below the full market rate, that’s still a gift with a reservation of benefit. HMRC’s position is that unless you’re paying the commercial rent for that property, you’re still benefiting from the gift — and the whole property remains in your estate as a result. Not just the portion you’re underpaying on. All of it!
This is also catching people out who thought they’d done everything correctly. Rents have risen significantly over the last five years. If you set a rent at market rate back then and haven’t reviewed it since, there’s a real chance you are paying below market value rent today — which means you’ve drifted back into reservation of benefit territory without realising it. The rent needs to keep pace with the market, which means reviewing it regularly and documenting the review.
And you may also have lost the Residence Nil Rate Band — an additional allowance of up to £175,000 per person that reduces inheritance tax specifically when your home passes to direct descendants. If the home is no longer yours to pass on at death, that relief could be gone too.
The final sting in the tail is that you could have also created a capital gains tax problem from the date of the transfer. Your children now own a property they don’t live in. When it’s eventually sold, they could face a CGT bill on any gain since the property was put into their name.
So, if you put the home into your children’s name 15 years ago, have been living in it rent free or below the market rate of rent your children could be in a situation where they have to pay double taxation as for inheritance tax the property forms part of your estate at the date of death but for capital gains tax you own the property from the date of the transfer.
Taking one of the examples that we dealt with recently. The clients mother transferred the property into her name in 2002 when it was worth £275,000 her mother died in 2025 when the property was worth £440,000. Her mother had lived rent free in the property during this time.
The inheritance tax on the property was £106,000
The capital gains tax on the sale was £38,800, as this is based on the £275,000 value and not the value in her mother’s estate,
HMRC isn’t unaware of this either. Land Registry, Council Tax and your personal tax records are publicly available. When someone dies, HMRC can — and does — cross-reference this information.
And there’s a risk that has nothing to do with tax. Once you transfer your home, you have no legal right to stay in it. Your children’s lives can change — divorce, bankruptcy, a relationship breakdown, simply falling out. Any of those can put your home at risk without anyone intending it. That’s a significant danger before you even get to the tax consequences.
There are legitimate ways to plan around inheritance tax. The family home rarely responds well to DIY solutions — and in both cases, the rules are specifically designed to catch arrangements that look like avoidance.
If this is something you’ve already done, or you’re considering it, please take proper advice before going any further. You know where we are.
