Q I've a friend who wants to gift their fully paid off house to their son, and still remain living in it. It is below the threshold for inheritance tax so what would she or the son be liable for?
Would she still be required to pay him rent and what sort of values would be allowed? Would it have to be market rates? NM
A If your friend gave away her house and continued to live there rent-free, on her death, the gift would be treated as what's called a "gift with reservation" because she continued to benefit from the house after making a gift of it.
What that means for inheritance tax is that the house would still form part of her estate when calculating the possible tax bill. So there's no advantage of giving the house away now and living in it without paying rent.
But if she did pay her son a market-rate rent for the house after giving it to him, it would be treated as a genuine gift and so would not form part of her estate on death (assuming she dies over seven years after making the gift).
However, I'm struggling to see why your friend would want to give up control of and pay rent on a home that she owns outright, and so is currently not costing her anything. Assuming she wants to carry on living there until she dies, it would be much simpler ? and cheaper ? for her to leave the house to her son in her will.
Source: http://www.guardian.co.uk/money/2011/may/18/gift-house-inheritance-tax
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