The Inheritance Tax Risks of Gifting Your Home but Still Living There

 Introduction: Why Gifting the Family Home May Not Be a Simple IHT Solution

It’s a common estate planning strategy: gift your home to your children to reduce the size of your estate and save on inheritance tax (IHT). If you survive seven years after making the gift, it becomes a potentially exempt transfer (PET) and escapes IHT entirely.

But what if, after making the gift, you move back in—even temporarily?

Unfortunately, the tax rules aren’t quite as generous as they may seem. HMRC is on the lookout for “gifts with reservation of benefit” (GWR), and they can catch unsuspecting families off guard, triggering an unexpected inheritance tax bill.

In this article, we’ll explain how the GWR rules work, when they apply, and what you can do to plan around them.

 What Is a Gift with Reservation (GWR)?

The GWR rules are a key anti-avoidance measure in UK tax law. They were introduced to stop people from giving assets away to reduce their estate value for IHT—while still enjoying the benefit of those assets.

 In short:

If you give something away but continue to use or benefit from it, it may still be treated as part of your estate when you die.

In the context of property, this usually means:

• Continuing to live in a house you’ve gifted to your children
• Staying regularly or reoccupying the property for longer periods
• Having control or significant access to the property

If caught by the GWR rules, the value of the home is added back to your estate for IHT purposes—even if you made the gift years ago.

 Common Scenario: Parent Gifts Home to Adult Child

Let’s say Margaret, age 78, gifts her house to her daughter, Sophie, in 2024. Margaret moves into a nursing home. The house is worth £500,000.

If Margaret lives for 7 more years, the house is no longer counted in her estate, and no IHT is due on that gift.

But what if:

• Margaret moves back in with Sophie in 2026?
• She stays for a few months a year to recover from illness?
• Or she decides to sell the nursing home spot and live part-time with her daughter?

That’s where GWR rules come into play.

 When Is Living in a Gifted Property Allowed?

HMRC has issued guidance (Revenue Interpretation 55) clarifying limited exceptions to the GWR rules.

 The following may not be caught by GWR:

• Occasional short stays, e.g. less than 1 month per year
• Use of the property when the donor is not staying overnight, e.g. using a guest bedroom for a short visit
• Staying for up to 2 weeks when the donee is away
• Temporary occupation for health reasons, such as convalescing after surgery
• Staying while providing care to the donee (e.g. helping a sick child or grandchild)

In these cases, the donor is not seen as retaining a benefit, and the gift may remain exempt—if the 7-year rule is satisfied.

 Pay Market Rent to Avoid GWR

If the donor wants to live in the home they’ve gifted, one legitimate workaround is to pay full market rent to the new owner (the donee).

This removes the “reservation of benefit” and prevents the property being added back into the estate for IHT purposes.

 Important notes:

• The rent must be market value and paid regularly
• The arrangement must be documented
• The donee will have to declare rental income and may owe income tax
• The donor should also contribute to bills and maintenance costs

 Example: Margaret pays her daughter Sophie £1,500 per month to live in the home she previously gifted. Sophie declares this as rental income on her self-assessment return. The gift is not caught by the GWR rules—so long as rent continues to be paid.

 GWR Exception: Care and Maintenance

In certain compassionate situations, a GWR exemption may still apply if:

• The donor reoccupies the property due to old age, illness or infirmity
• The occupation was the result of an unforeseen change in circumstances
• The donee is a relative and is providing care or maintenance
• The occupation is reasonable and necessary

This exemption is strictly interpreted by HMRC and should not be relied on without professional advice.

 Planning Example: The Tax Impact of GWR

Let’s compare two outcomes for the same property:

 Other Taxes and Legal Considerations

1. Capital Gains Tax (CGT)

If the donee sells the property later, CGT may apply, especially if it wasn’t their main residence.

Gifting a home is a disposal for CGT purposes if it is not your main residence.

2. Security of Tenure

Once the home is gifted, the legal title changes hands. If your relationship with the donee breaks down, you could be evicted or have no legal right to stay—unless formal agreements are in place.

3. Deprivation of Assets

Gifting your home to avoid care home fees can be challenged by local authorities under deprivation of assets rules.

 Practical Planning Tips

•  Seek advice before gifting your home—especially if there’s any chance you’ll live in it again
•  Use a formal rental agreement if you intend to stay long-term
•  Document all payments and occupancy
•  Review wills, powers of attorney, and trusts when restructuring property ownership
•  Keep a record of dates and duration of any stays in the property

 Speak to Merranti Before You Gift Property

At Merranti Accounting, we work closely with families to:

• Structure tax-efficient property gifts
• Avoid common inheritance tax traps like GWR
• Navigate CGT, IHT, and care fee implications
• Coordinate with solicitors to protect your legal interests

Whether you’re gifting a home now or planning for the future—speak to us before you act.

 Book Your IHT Planning Review Today

Contact Merranti Accounting
 Visit: HMRC – Inheritance Tax and Gifts

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