Can I leave my house to my children without paying Inheritance Tax?
Inheritance Tax (IHT) is a concern for many families looking to pass on wealth to the next generation, particularly when it comes to the family home, which is often the most valuable asset in an estate. Understandably, one of the most common questions we hear at Kings Court Trust is: “Can I leave my house to my children without paying Inheritance Tax?”
While it's not always possible to avoid Inheritance Tax entirely, several allowances and strategies may reduce or even eliminate the tax owed when transferring your property to your children. Below, we explore key rules and options, including the Residence Nil Rate Band (RNRB), gifting and Trusts, and the difference between leaving property in your Will versus transferring it during your lifetime.
Residence Nil Rate Band and main residence rules
The Residence Nil Rate Band (RNRB) was introduced to help families pass on the family home without incurring excessive Inheritance Tax. As of the 2024/25 tax year, individuals can benefit from an additional £175,000 allowance when leaving their main residence to direct descendants (children, stepchildren, or grandchildren), on top of the standard £325,000 Nil Rate Band (NRB). This means a couple could potentially pass on up to £1 million tax-free, assuming both NRB and RNRBs apply.
However, there are limitations:
- The RNRB only applies to one property, which must have been a main residence at some point.
- It only applies if the property is left to direct descendants.
- The RNRB tapers for estates over £2 million, reducing by £1 for every £2 over this threshold.
Proper estate planning, including using both spouses’ allowances and considering how property is owned (joint tenancy vs tenancy in common), can help maximise these tax-free thresholds.
Lifetime transfers and gifts with reservation of benefit
One way to potentially avoid IHT on your home is to give it away during your lifetime. If you gift your home to your children and live for seven years after making the gift, it may fall outside your estate for IHT purposes. However, a major pitfall to avoid is the Gift with Reservation of Benefit (GWR) rule. If you continue to live in the property rent-free or retain access to it after gifting it, HMRC will still consider it part of your estate for tax purposes.
To avoid the GWR trap, you would need to:
- Pay full market rent to your children if you continue living there, and;
- Avoid retaining any control or benefit over the property.
Using Trusts
Trusts are sometimes used as part of Inheritance Tax planning, but they come with complexity and ongoing administration. Putting a house into a Trust can:
- Offer control over how and when the property is passed on.
- Help protect assets from divorce or bankruptcy in the beneficiary’s life.
However, most Lifetime Trusts involving property can trigger immediate IHT charges if the value exceeds the Nil Rate Band, and they are also subject to ten-year periodic charges. Trusts are best considered with expert legal and tax advice, as their benefits often lie in control and protection, rather than outright tax savings.
Gifting vs leaving in a Will
Deciding between gifting your property during your lifetime or leaving it in your Will depends on your circumstances.
Gifting during lifetime may reduce IHT if:
- You survive seven years after the gift;
- You do not fall into the GWR rules.
However, gifting means you lose control and possibly access to the property, which might not be ideal depending on your financial needs in later life.
Leaving property in your Will allows:
- Continued use of your home during your lifetime;
- Full use of the Nil Rate Band and Residence Nil Rate Band;
- Flexibility to change plans if circumstances evolve.
Final thoughts
Can you leave your house to your children without paying Inheritance Tax? The answer is: potentially yes, but it depends on how your estate is structured and whether you make full use of available allowances, such as the RNRB, and avoid common pitfalls like the GWR rules.
