We’re in our 40s, can we split our house with our two children now to avoid an inheritance tax bill?

Can we split ownership of our family home between us and our two school age children to beat inheritance tax?

Our family is about to get caught in the inheritance tax net due to the pension pot changes coming in next year.

My wife and I have two children, aged 12 and 10, live a house that’s worth just over £1million and both have defined contribution work pension pots worth about £600,000 between us.

We are in our mid-40s, so hopefully inheritance tax won’t be an issue for many years, but once you add our savings and Isas into the mix and take off our £400,000 mortgage, we probably have a total joint estate including the pensions that is worth about £1.2million.

We’ve never really thought about inheritance tax before, but it now seems if something bad happened it could be a problem for us – and one that as our pensions grow is only likely to get worse and could cost our children hundreds of thousands of pounds.

This seems somewhat unfair, as we are being penalised for living in an expensive part of the country, in Buckinghamshire in the London commuter belt, and doing what we are meant to in saving for our retirement.

Could we add our children’s names to our deeds and put the house equally in all four of our names now? After seven years, would this gift then be free of inheritance tax?

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Harvey Dorset, of This is Money, replies: Inheritance tax is increasingly becoming a concern for families who may never have considered their liability before.

From April 2027, pensions are set to be included in inheritance tax calculations, so as you rightly say, this will bring your estate comfortably above the maximum IHT-free allowances available to you.

Your situation is one that will be echoed in mass affluent family households across the south of England, where high house prices already leave many knocking on the door of an inheritance tax liability. Pension pots will tip many into one.

Both you and your wife are entitled to the £325,000 nil-rate band and the £175,000 residence nil-rate band. You can pass assets to each other IHT-free. Whichever of you that survives the other will be able to make use of the other’s unused allowance, bringing your effective combined allowance to £1million.

It is good that you are planning well in advance to ensure your children benefit from your wealth, but gifting rules can catch you out if you aren’t careful – and seemingly clever plans can come unstuck.

This is Money spoke to two financial advisers to find out how you can ensure that as much of your estate as possible can be passed onto your children.

Jonathan Halberda, specialist financial adviser at Wesleyan Financial Services, replies: This is a question I’m being asked more often, especially with the proposed changes to how pensions may be treated for inheritance tax from 2027.

I completely understand why you are feeling frustrated. You’ve done the right thing by saving for retirement and planning ahead, yet inheritance tax now feels like a growing concern rather than a distant one.

Adding your children to the ownership of your home would not be a straightforward or risk-free way of reducing inheritance tax, and in most cases, it creates more problems than it solves.

While it is technically possible to gift part of a property and for that gift to become free of inheritance tax after seven years, this only works if you genuinely ‘give up’ the part of the house that you’re gifting, from the very moment you gift it.

That would mean moving out entirely, or paying a full market rent to your children for the proportion that you no longer own, with that arrangement properly documented and operated on a commercial basis.

While it feels logical that you could keep living in the property, given that you still own half of it, tax law needs to see that you’ve genuinely given up ‘benefit’, and property ownership doesn’t practically work that way if you’re still living in the house, rent-free.

By gifting half of the house, you are dividing the legal and beneficial value of the property, not four distinct and separately usable quarters of the building.

In practical terms, everyone is still living in – and benefiting from – the whole home. Because of this, HMRC would almost certainly argue that you have not given up benefit because you’re still under the same roof, meaning the inheritance tax position is unchanged.

In that situation, the value of the gifted share would still be included in your estate for inheritance tax purposes, even after seven years.

There are also several practical and legal issues to consider. As your children are minors, any ownership interest would need to be held through trustees, which adds complexity and cost. You would also be giving up control of part of your home, which could cause problems if you later wanted to move, remortgage or if circumstances changed.

There can also be capital gains tax implications for your children in the future, as their share would not benefit from main residence relief in the same way as yours.

It’s also important to keep this in proportion. Based on what you’ve outlined, you are not currently in a severe inheritance tax position, particularly once allowances, spousal exemptions and the residence nil-rate band are taken into account.

You are also in your mid-40s, which means there is time to plan sensibly rather than take irreversible steps now.

Inheritance tax planning is usually most effective when it’s done holistically, looking at pensions, wills, beneficiary nominations, life cover written in trust, and longer-term gifting strategies as your children become adults.

Pensions in particular still play a very effective role in planning despite the proposed changes, especially when nominations are set up correctly.

My recommendation would be not to change the ownership of the family home at this stage, but instead to seek tailored advice that reflects your full financial position and can adapt as rules and circumstances evolve.

Sue Allen, chartered financial planner at Chester Rose Financial Planning, replies: Adding children to the deeds of the family home is not a practical or effective way to reduce inheritance tax, and in most cases, it would not be allowed in the first place.

Mortgage lenders will almost always refuse to permit children (under 18) to be added to the title of a mortgaged property, as they cannot be parties to a mortgage contract. 

Even without a mortgage, the tax outcome is rarely what families expect.

As HMRC will treat this as a ‘gift with reservation of benefit’, the gifted share remains fully within the parents’ estate for inheritance tax purposes, regardless of how long they survive – the seven-year rule does not apply.

It is sometimes suggested that this can be avoided by paying market rent to the children. In reality, this is usually impractical. The rent must be a genuine full-market rent, paid continuously for life, and the rental income would be taxable to the children. For families with minor children, this approach is rarely workable and often creates more tax problems than it solves.

There may also be stamp duty to pay at the point the property is transferred. If a share of the home is given to a child and there is an outstanding mortgage, HMRC can treat the mortgage element as ‘consideration’, potentially triggering a stamp duty charge immediately.

There are also significant practical risks. Once children reach adulthood, they would legally own part of the property, which can complicate moving, downsizing, or remortgaging. They may expose the family home to risks such as divorce or bankruptcy in later life.

A more sensible starting point for families concerned about inheritance tax following the pension changes is to ensure their wills and pension beneficiary nominations are properly structured. It is also worth remembering that it is highly unlikely that both parents would die at the same time. In most cases, pensions will pass to the surviving spouse first, with inheritance tax only becoming an issue on the second death.

Planning solutions that are often more appropriate include careful will and trust planning, reviewing pension nominations, and, in some cases, using life insurance written in trust to cover a future inheritance tax bill. These approaches address the risk directly, without giving away control of the family home or creating unnecessary tax complications.