Advisers outline options for buying a home with a child while managing inheritance tax

A reader asked whether buying a house jointly with a daughter and grandson would expose the daughter to inheritance tax when the parent dies, and how to structure ownership to protect the family if care costs arise. After selling their current homes, the reader would have about £500,000 to contribute and the daughter around £300,000. Financial advisers say there are viable ways to balance the goal of helping a child with potential tax and care-cost considerations, but the answer depends on how the property is owned and how future costs are funded.

Patrick Haines, a chartered financial planner at Partners Wealth Management, notes that many people in the so‑called sandwich generation face similar questions. Owning a multi‑generational home can be appealing, but it also raises inheritance tax and local-authority care questions that must be planned for in advance. He outlines three main approaches homeowners could consider, each with its own implications for future tax bills and the risk of having to sell the property to fund care.

Option 1: An outright gift of the reader’s £500,000 for the purchase. If the reader survives seven years after making the gift, the amount would generally fall outside the estate for inheritance tax purposes. However, the reader would not be able to live in the home tax‑free unless they paid their daughter market rent, otherwise it could be treated as a gift with reservation of benefit and remain inside the estate for IHT.

Option 2: A loan to the daughter instead of a gift. In this arrangement, the gift remains within the reader’s estate for IHT purposes, but the reader could still live in the property with the daughter. Some people also consider a life‑cover policy written into a trust to help meet any IHT due on death, potentially allowing the daughter to keep living in the home without needing a loan arrangement.

Option 3: Ownership of a share in the property while living as tenants in common. This structure lets the reader and daughter own unequal or separate shares, and each can pass their own portion to chosen beneficiaries in their wills. There is no automatic IHT saving with this approach, but the arrangement can offer more control over who inherits what and can help protect the portion held by the reader if care costs arise. In this setup, the daughter would not be forced to sell the home to meet the reader’s care costs if the reader were to require care later.

Across all three options, advisers note that an equity‑release loan or mortgage could still be used to fund care costs if needed, provided the reader is over 55 and understands how such loans accrue interest and roll up. Any remaining loan balance could be repaid from the estate or other assets when the reader dies. A life‑insurance policy written into trust, with proceeds paid to the daughter, could also help cover expected IHT without forcing the family to liquidate the home.

Abigail Thompson, an independent financial adviser at Flying Colours, adds that choosing between joint tenancy and tenancy in common is an important part of estate planning. A joint tenancy would give the two owners equal rights to the whole property, and the survivor would automatically inherit the other’s share on death. By contrast, tenancy in common allows unequal ownership shares and enables each party to bequeath their share to someone else, such as a grandchild. Given the aim of protecting the daughter and grandchild, tenancy in common is often more suitable for ensuring that a share can pass to designated beneficiaries.

Thompson also reminds readers of the basic IHT framework: individuals typically have a £325,000 nil‑rate band, plus an extra £175,000 residence nil‑rate band when a home passes to a direct descendant. Together, that can amount to about £500,000 of tax‑free assets per person, though many caveats apply. The reader’s broader asset position, potential spousal allowances, and any unused allowances from a deceased spouse can influence the IHT outcome. If the reader’s estate exceeds these thresholds, IHT could be due at 40% on the excess.

Care costs add another layer of complexity. If the reader needs residential care in the future and their capital exceeds about £23,250, they are likely to self‑fund. Local authorities may still disregard the family home in some circumstances if keeping it would prevent homelessness for a member of the household, but such discretion is not guaranteed. In many cases, councils offer a Deferred Payments Scheme in which care fees are charged against the value of the home and paid later, typically upon sale of the property. If there are insufficient liquid assets to cover ongoing care costs or IHT, the reader’s share of the home could be required to contribute or be sold.

To help manage IHT, HM Revenue & Customs allows IHT to be paid in instalments over up to 10 years where appropriate, though interest applies. Executors can also use probate loans to pay IHT and repay them when the property is sold. Some people use life insurance written into a trust to cover all or part of the IHT bill, enabling the property to stay within the family rather than being forced to sell to meet tax obligations.

The advisers caution that gifting property, or occupying it after a gift, can trigger the gift‑with‑reservation rule, which could result in the gifted portion remaining part of the donor’s estate. Paying a market rent rather than living rent‑free can help avoid that outcome. In all cases, the parties should obtain help from a solicitor and a tax adviser to ensure the ownership structure matches the family’s goals and is compliant with regulations.

As with many financial decisions, the starting point is professional guidance. The reader is encouraged to discuss ownership structures with a qualified solicitor and financial adviser to tailor the approach to their family’s circumstances and to anticipate changes in tax rules and care‑cost policies. This Is Money’s advisory columns often serve as a starting point for these conversations, but they emphasize that the precise structure should be designed with professional help and aligned with the family’s long‑term needs.