Buying a Home with a Daughter and Grandson Without Triggering Inheritance Tax

A reader planning to buy a home with their daughter and young grandson asked whether inheritance tax would apply after the parent dies and how care costs could affect ownership. After selling their current homes, the reader would contribute about £500,000, while the daughter would bring roughly £300,000. They want to know the best way to split ownership to protect the daughter’s future and the grandson’s interests, while keeping options open for potential care needs.

This Is Money consulted two financial advisers to outline the main paths people in this situation consider and the trade-offs involved. The issue is increasingly common among the so‑called sandwich generation, who are balancing parental care with helping children into adulthood. Advisers caution that there is no one-size-fits-all answer, and that the optimal structure depends on broader circumstances, such as other assets, family dynamics, and the likelihood of needing residential care. They also stress the importance of securing a specialist property lawyer to map out ownership details and guard against problems if relationships change or disagreements arise in the future.

Option 1 involves an outright gift of the planned £500,000 to the daughter to purchase the property. If the donor survives seven years after the gift, that amount is typically outside the donor’s inheritance tax (IHT) scope. However, the donor would not be able to live in the property rent-free without triggering a gift with reservation of benefit, which could keep the asset inside the donor’s estate for IHT purposes. To use this route while staying in the home, the donor would generally need to pay market rent to the daughter.

Option 2 suggests lending the £500,000 to the daughter rather than gifting it outright. The loan would keep the money within the donor’s estate for IHT purposes, potentially preserving the donor’s control and still allowing living in the property. The arrangement can be structured to allow occupancy by the donor, but it requires careful terms to avoid unintended tax consequences or disputes if the relationship or financial circumstances change. Some advisers also suggest pairing these arrangements with a life insurance policy written into trust to meet potential IHT liabilities, ensuring the daughter can remain in the home without resorting to further loans.

Option 3 would have the donor and daughter owning the property as tenants in common, each with a defined share (for example, 60-40 or 50-50). The advantage here is greater control over what happens to each person’s share after death and more precise estate planning for future generations. The approach would not generate IHT savings on its own, but it can help protect the asset from being eroded by care costs because the structure can keep the property in the family even if one party needs residential care. If the donor goes into care and only a portion of the property is tied to their ownership, the remaining share can continue to be owned by the daughter or passed to a grandchild as intended. Equity-release options could also be considered to cover care costs or any IHT due, subject to age limits and terms, and any such loan could be repaid from the estate later.

Across these options, advisers note that equity-release loans or mortgages may be appropriate for some families if a relative needs residential care and there are insufficient other assets to pay for fees. These products are available to those aged 55 or older, but interest compounds over time and can be costly if a long-term repayment plan is needed. Any use of equity release typically requires professional guidance to ensure the loan is structured in a way that aligns with long-term goals and minimizes unintended consequences for the estate.

There are other tools to consider as well. A life insurance policy written under a trust can cover some or all of any IHT due on death, allowing the daughter to continue living in the home without needing to find funds to pay IHT from other assets. The overarching aim is to enable your daughter and grandchild to benefit from the estate while reducing the risk that the home would have to be sold to cover care costs or IHT.

Another adviser, Abigail Thompson of Flying Colours, highlights two foundational ownership choices. First, ownership can be structured as joint tenants or as tenants in common. A joint tenancy means both owners have an equal share of the whole property, and the surviving owner would automatically inherit the entire property on death. However, a joint tenancy does not allow you to pass your share to other beneficiaries through a will. By contrast, tenancy in common lets each owner hold an explicit share, and you can specify who inherits your share via your will (such as a child or grandchild).

Thompson also emphasizes the role of IHT allowances. Each person has a nil-rate band of £325,000 and, if a home is passed to a direct descendant, an additional residence nil-rate band (RNRB) of up to £175,000 per person. In theory, this combination can provide up to about £500,000 of IHT relief per person, subject to qualification criteria. If the donor’s total capital exceeds certain thresholds (for example, around £23,250 in some care scenarios), there is a greater likelihood that the local authority would require the person to fund some or all of their own residential care fees. Estates below these thresholds may avoid IHT, while larger estates could face tax charges.

For those who go into care and have a share in a jointly owned property, local authorities consider several factors when calculating care costs. In some cases, a qualifying relative living in the home can limit the asset’s treatment, but this is not guaranteed and depends on the specifics of the arrangement. Deferred Payment Schemes may enable council-funded care to be paid later, with a charge secured against the home, typically repaid when the property is eventually sold.

Thompson notes that if a gift is made, the “gift with reservation” rule could apply if the parent continues to live in the home rent-free. Paying a market rent is one way to avoid that trap, but it adds ongoing costs for the family and must be carefully documented to avoid dispute with the tax authorities or the courts.

In any scenario, advisers stress the importance of seeking professional guidance. A qualified solicitor can draft the ownership agreement to reflect differing shares and future intentions, while a financial adviser can model how each structure would affect IHT, care-cost planning, and liquidity for other goals. The complexity of tax rules, the potential impact of changing family circumstances, and the possibility of needing to fund care or IHT all require careful, bespoke planning. The guidance provided here is informational and not a substitute for regulated financial advice.

If you are considering these options, the recommended next step is to consult a solicitor experienced in cross-generational property ownership and a qualified financial adviser who can tailor an approach to your entire estate and its likely needs. For readers of This Is Money, these themes illustrate how family homes can be preserved for future generations while navigating inheritance tax rules and the costs of care in later life.

As with any complex financial and legal decision, the specifics will depend on your overall financial position, health, family structure, and the exact ownership and care-planning strategies chosen. A careful, personalized plan drawn up with professionals can help ensure that a property remains a source of security for your daughter and grandson rather than a source of future stress.