Can we put our children on our properties' deeds to avoid inheritance tax?

We are a retired couple and have two adult children, aged 45 and 30.

Our home is worth around £350,000 and we also have a buy-to-let property valued at £250,000. Both are owned in our joint names as tenants in common.

We also have investments worth £150,000.

We wish to pass on the two properties to our children, giving them one each.

We intend to do this by adding their name to each respective title deed as joint owners with us.

When we both pass on, will our children be subjected to inheritance tax? U.P

SCROLL DOWN TO ASK YOUR FINANCIAL PLANNING QUESTION

Harvey Dorset of This is Money replies: An increasing number of people are being dragged into paying inheritance tax as the allowance remains frozen and house prices gradually rise.

Now, with pensions set to be included in IHT calculations from 2027, this will pull even more estates into the net.

At the moment, your estate is not of the size that will make it liable for an inheritance tax charge - provided you are able to use your full allowances and also spousal transfer.

This would mean you and your husband could, collectively, transfer up to £1million to your children tax-free.

As discussed below, however, upcoming changes could affect this depending on the size of your pensions - and if they take you over that £1million mark.

In your case, with an estate worth £750,000, your pensions would have to be worth more than £250,000 combined for this to happen.

But avoiding this also isn't as simple as you placing your children's names on the title deeds of your properties.

In fact, your situation could prove problematic further down the line if you don't handle it properly.

To find out what you need to do to ensure your children aren't stung with inheritance tax, This is Money spoke to a financial adviser and solicitor, who share their responses below.

Tom Garsed-Bennet, independent financial adviser at Flying Colours, replies: This is a common concern for our clients.

Assuming you have no other assets, there is no IHT liability as your estate is valued at under £1million.

However, if you have defined contribution or personal pensions, these will become part of your estate from 6 April 2027 and could tip it into IHT territory.

As it stands, there appears to be no IHT benefit in adding your children's names to the property titles. It could even be a hinderance for tax planning if they were.

This is because adding children to their parents' main residence property deed could trigger a 'gift with reservation of benefit' situation.

In this case, His Majesty's Revenue and Customs could still treat the 'gift' - in this case a share of your home - as part of your estate, as you were still using it at no cost.

The child who received a share of your main home would also be liable for capital gains tax on any gain in value on their share, as it would effectively be a second home.

If you and your husband to retain your main residence in your names only, it would not be subject to CGT.

The child that was put on the deeds of the buy-to-let property would be entitled to a proportion of the rental income as part-owner. They would also be subject to capital gains tax once the property was sold.

Read More

If there is any concern around residential care fees eating into your estate in future, then a property protection trust might be a good option for you.

This allows the 50 per cent share of the property to move into a trust on first death (of either yourself or your spouse).

The remaining spouse can continue living in the property or move house (as they have a lifetime interest), but they only own 50 per cent themselves. This is normally written into your will and only becomes effective on the first death.

This approach means that should the remaining spouse need residential care in future, only their half of the house can be accessed to pay for their care. The other half of the house is ring-fenced within a trust for the beneficiaries - your children in this case.

I would always advise you to seek independent professional advice to guide you through this process, however, as IHT is a notoriously complex area.

Joshua Ryan, principal associate at Weightmans LLP, replies: With tax and estate planning, the starting point is to take a step back to assess your assets holistically. This tends to lead to more planning options.

The combined value of your estates is £750,000. Each individual has an inheritance tax-free allowance, which is known as the nil rate band.

This allowance is currently set at £325,000, but is reduced by gifts made in the seven years prior to your death.

Equally, if you leave residential property to a child or grandchild, and the value of your estate is beneath £2million, you can claim an additional allowance called the residence nil rate band allowance, which is valued at £175,000.

The total value of both allowances is £500,000 per person, or £1million for a couple.

Circling back, it would seem as though the value of your estates is within your available allowances and so you are not presently exposed to inheritance tax.

Aside from preparing a tax-efficient will to ensure that the above allowances are retained in full, the best planning strategy would be to do nothing, for now, and to keep an eye on the value of your estates.

With this being said, if the value of your estate exceeds the available inheritance tax-free threshold, you might want to take steps to reduce the size of your estate to reduce the inheritance tax payable on your deaths.

This should be guided by professional tax and legal advice. There are many anti-avoidance rules and requirements that need to be carried out, and failure to follow these rules not only leads to unnecessary costs but also in many cases significantly increases the tax liability payable on your death.

Key points to note when dealing with properties are as follows:

1. The UK has a principle that you cannot retain a benefit from an item gifted – this is known as the gift with reservation of benefit rule, and it means if you give something away you cannot continue to benefit from it.

Therefore, simply adding your children’s name to the title deeds will not work – you have not given the asset away, and so you will be liable to inheritance tax on the property.

2. Equally, certain allowances such as the residence nil rate band allowance rely on you owning your home or the proceeds of your home on death.

If you gift your home then you do not own it – this reduces your available allowances, and I have seen many a case where inheritance tax is due as a result of the lost allowances.

3. There are steps that you can take to gift a share of the property to your children – but this planning is not straightforward, and needs careful consideration.

Read More

There is more than one way to do this too: you can gift and rent back, you can gift a part of the property, or you can move your children in with you and gift. Each one has strict requirements so you need to ensure you abide by these, and to take professional tax and legal advice.

4. Finally, when gifting properties that are not your home then you risk generating a capital gains tax liability. The current capital gains tax rate is 24 per cent on the gain made.

Equally, if you gift the property and do not reserve a benefit from it, then the value of the gift is classified as a potentially exempt transfer.

You need to survive the date of the gift by seven years to avoid the value being amalgamated with the value of your estate on death. The worst case scenario is that you pay 24 per cent capital gains tax on the gain made by the property, and then 40 per cent inheritance tax on the value of the gift.

In summary, there are options but these should be guided by professional tax and legal advice from a solicitor that advises on inheritance tax mitigation.