'Gifting' a house in the UK

If you sold your house to your children for a nominal sum then you'd have to pay rent to the new owner in order to continue to live in that house. The rent would need to be a market rent. Doing otherwise is called a "gift with the reservation of benefit" which means it's still treated as part of your estate when you die or go into care. The new owners would also be liable to pay tax on this rental income.

You'll also need to live for at least 7 years after the transfer.

There have been court cases where people have made gifts (not just houses) and councils have challenged the legitimacy of these gifts. Basically if the gift is primarily to avoid taxation it is called “deliberate deprivation of assets” and could be treated as if it did not occur.

That means giving gifts after you become ill is treated differently to gifts given if you are not ill and have no particular expectation that you will become ill in the future.

The size and type of gift is also significant, a wedding present to a child would be different to a random gift for no particular purpose for instance.

There's more information about property transfer and avoiding care home fees here, although there are plenty of other resources if you search for them.

Also, selling an asset at a price far below market value can have unintended consequences (at least in the US). In the case of a residential property, it might make sense to sell it at fair market value, and pay rent to the new owners such that it covered the mortgage on the property that they would have taken out to pay for it.

I work for a firm of Chartered Financial Planners, but I am not one myself and this is not Financial Advice. Do your own research and get Financial Advice from someone qualified to give it.

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What you're looking for is a Potentially Exempt Transfer or PET.

PETs work like this:

1. You give away some part of your estate (in this case your house) and receive no further benefit from it.
2. You wait 2 years.
3. For every year after that, 20% of the value of the gift is considered no longer part of your estate.
4. After 7 years, the entire gift is no longer part of your estate and isn't part of Inheritance Tax calculations.

So if a parent gives a house to their children and lives for another 7 years, there is no way (under current law) for the government to recoup it upon the parent's death.

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Rules & Exceptions:

When it says give away your house, it really does mean give it. Your children can't let you live there rent free, or with subsidised rent, or with any other kind of explicit benefit. If the government decides that you are somehow receiving a benefit from a gift, this is called "gifts with reservation of benefit" and does not count.

If you are means-tested in the meantime (say for Local Government Social Care), the government might challenge the gift as "Deliberate Deprivation of Assets". The longer between the gift and when this happens, the less likely you are to have a problem.

Where I work, we generally advise parents to give away the house to their children, and then rent it from them at market rates. (If the market rate is difficult to determine, try to figure out what local properties charge as a % of what they're worth, and go with that percentage. Or just ask an Estate Agent).

what stops parents selling their home to their children for some nominal fee, say £1

arm's length

I personally don't mind the down votes, because I'm not an expert myself, but I've asked this question to people who know a lot about taxes, and they summed it up as "arm's length". You might think that you can sell your house for £1 and that's what it's worth because that's what someone paid for it, but tax-wise, you can still be responsible for paying taxes at the rate that someone else would have paid for the house.

Anyways, if you don't believe me, get some professional advice before you sell your house to a relative for £1.