Can we gift our daughter three of the bedrooms in our house to lower inheritance tax bill?

Inheritance tax is a minefield for us. We do not want to leave our daughter with a big tax bill after we die, but our house may be worth £1million in 20 years.

We have been advised to make a trust under Section 102. We've also been told to give our daughter three of our bedrooms, then if the last person survives seven years the house will not be included in IHT.

This is because it will already be registered with the Government, and she will only have to deal with probate on the remaining funds. The cost would be north of £5,000.

I'm not clued up about this, so can this be set up so that the last person to die be after seven years? For example, I could die tomorrow but my wife could live over seven years.

Any advice welcome.

Angharad Carrick of This Is Money says: Inheritance tax (IHT) is a thorny issue and I understand why you and your wife do not want to leave your daughter with a huge tax bill.

Frozen thresholds combined with rising asset prices, including the value of homes, investments and savings, are already dragging more people into the IHT net.

IHT is levied at 40 per cent on estates above a certain size.

As an individual, your estate needs to be worth more than £325,000 for your loved ones to have to pay IHT. This can be doubled to £650,000, jointly, for married couples or civil partners, who have not already used up any of their individual allowances.

A further crucial allowance, the residence nil rate band, increases the threshold by £175,000 each for those who leave their home to direct descendants.

This gives a total potential extra boost of £350,000 and creates a potential maximum joint inheritance tax-free total of £1million.

Changes to the rules in 2027 will also bring pension pots into people's estates, which will only add to the numbers due to pay death duties.

This Is Money recently revealed how this change will add thousands to some families' tax bill.

There are several ways to mitigate the tax's impact, but the rules are complex.

We asked some tax experts for some general thoughts on using a trust for IHT and whether it's possible to gift your daughter part of your property.

Natalie Butt, Director, Private Clients at Crowe, says: A trust is a mechanism whereby an individual can move assets out of their estate. To get relief from IHT, an individual would need to a) give the asset away and retain no benefit, and b) survive 7 years from the gift.

When an individual gifts any asset into a Trust, this is a lifetime chargeable transfer and is subject to an immediate charge to IHT – on the basis that the individual has not settled Trusts in the preceding 7 years, they would have the first £325,000 at 0 per cent and the balance above at 20 per cent.

Generally, if the settlor survives for 7 years after making a gift to a Trust and has no benefit, it will fall outside of their estate.

Trusts come with both legal and taxation reporting requirements, including registration on the Trust registration service, which is managed by HMRC. Trusts are often irrevocable and should not be entered into without due care and attention.

For IHT purposes, when a married couple, or couple in a civil partnership, put assets jointly into a Trust, they are deemed to have both made the gift on the percentage of what they bring to the table.

For example, if a rental property was owned tenants in common with a 60/40 split, then the total value would be apportioned. If one of the couple were to die within the 7 years, then their gift will fall back into their estate.

Rachael Griffin, tax and financial planning expert at Quilter says: At the heart of this is a concept known as the 'seven-year rule'. If you give something away like a share in your property, and survive for seven years, then that gift is generally outside your estate for IHT purposes.

But there's a key catch you can't still benefit from what you've given away.

This is known as a 'gift with reservation of benefit' (GWR), and it means if you keep living in the house rent-free after giving it away, HMRC will treat it as still being part of your estate, and tax it accordingly.

That's where Section 102 of the Finance Act 1986 comes in. It outlines the GWR rules and is designed to stop people dodging IHT while continuing to enjoy the benefit of the gifted asset.

Simply giving your daughter three bedrooms, while you and your wife carry on living in the house, would fall foul of these rules even if one of you survives another seven years.

Some people try to mitigate this by paying market rent to the person they've gifted the house to but that's often impractical, especially when the beneficiary is a close family member like a child. HMRC expects it to be properly documented and paid consistently.

Butt says: It is very difficult to give away your family home and continue to live there. One option an individual may consider to help ease the impact of IHT is to take out a life assurance policy.to insure the tax.

This policy could be written into Trust and be accessible straight away on death. It should be outside the scope of IHT and enable the beneficiaries to pay the tax.

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If that is not an option due to age, some individuals are considering lifetime mortgages and using the cash borrowed against the property to gift to children.

The alternative is for the parents to pay market rate rent to their children for the gift to be IHT effective.

This technique though depletes cash savings and means the children have a reporting obligation to HMRC for the rent received and creates an income tax charge for them, so this is probably seen as a last resort.

It would be advisable for individuals considering their options to seek professional advice.

Please note, we cannot give tax advice in isolation – we need to know the full picture of any clients' needs. However, we can provide general pointers that should not be relied on.

Griffin says: The good news is that if your daughter is your direct descendant and the house is your main residence, then each of you currently has a £175,000 residence nil-rate band in addition to your £325,000 standard nil-rate band.

That means, as a couple, you could potentially pass on £1million tax-free — as long as your estate meets the criteria and doesn't breach the £2million taper threshold.

If those allowances remain in place and your only significant asset is your home, your daughter might not face an IHT bill at all.

But of course, tax rules can and do change. It's also important to consider your own financial needs. Gifting away your home or locking it into a trust could limit your options later in life, particularly if you need to fund care or downsize.

Probate may still be required, even if IHT isn't due, and it can come with administrative and legal costs. Getting clear advice from a financial planner or solicitor with estate planning expertise is a wise next step.

In short, be cautious about complex gifting arrangements, especially if you're still living in the property.