Giving Your House Away But Still Living in It: The Hidden Implications

It is not uncommon for homeowners, especially older individuals, to consider giving their property to children or loved ones as a form of inheritance planning. 

The idea often seems simple: transfer the legal ownership of your house while continuing to live in it. However, this can lead to complex legal, financial, and tax consequences if not properly structured.

In this article, we’ll explore the key implications of giving your house away while continuing to live in it in the UK.

1. Inheritance Tax (IHT) Implications: The Gift with Reservation of Benefit Rule

One of the most significant tax pitfalls in this scenario is the Gift with Reservation of Benefit (GWR) rule.

If you give your home away but continue to live there without paying full market rent, HMRC may consider that you haven't really "given it away" at all. This means:

• The house will still be counted as part of your estate for inheritance tax purposes when you die.
• You may not benefit from the potential IHT savings that such a gift might otherwise offer.

To avoid the GWR rule, you must either:

• Pay a full market rent to the new owner, and
• Not receive any other benefits from the property (such as discounted rent or utility payments covered by them).

2. Capital Gains Tax (CGT) Risks for the Recipient

When you give a property away, it’s considered a disposal for Capital Gains Tax purposes, even if no money changes hands.

For the recipient:

• If the property increases in value and is later sold (and it’s not their primary residence), they may face a Capital Gains Tax bill.
• Since they received the house as a gift, they inherit your original acquisition cost, which could lead to a higher taxable gain.

3. Impact on Care Fees Assessment

One motivation for transferring a house is to avoid the local council factoring it into means-testing for care home fees.

However, under the Deprivation of Assets rule, local authorities can still include the home in financial assessments if they believe the gift was made to avoid paying for care.

This means:

• You could be treated as still owning the home, despite no longer being the legal owner.
• The council might refuse to contribute to your care costs, and may even challenge the transfer.

4. Loss of Control

Giving away your home means you no longer legally own it. This can create significant risks:

• The new owner (even a close relative) could sell the house, remortgage it, or fall into financial trouble—potentially putting your home at risk.
• Relationship breakdowns (e.g. divorce) involving the new owner could also affect your ability to live in the property securely.

Tip: Consider using a trust or retaining a legal interest, such as a life interest trust, to protect your right to live in the home.

5. Practical and Emotional Considerations

Beyond the legal and financial aspects, it’s important to reflect on the emotional dynamics:

• Transferring ownership could create tension among family members.
• The sense of security that comes with home ownership may be diminished if you no longer legally own your home.

When to Speak to a Solicitor

While giving your home away may seem like a generous and smart way to plan for the future, the reality is much more complex with legal and tax risks. Without careful planning, you could inadvertently lose tax advantages, reduce your financial security, or end up paying more in the long run.

Always consult a solicitor before making any decisions about transferring property. With the right planning tools—like trusts, legal agreements, and informed family discussions—you can achieve your goals while protecting both your home and your legacy.