Family home ownership: guidance on inheritance tax and care costs when buying with a child and grandchild

A reader planning to buy a home with his daughter and grandson asked whether the arrangement could trigger inheritance tax for the daughter after the parent’s death or raise questions about who would pay for care costs later. The plan involves selling two homes and pooling roughly £500,000 from the reader and about £300,000 from the daughter to fund a joint purchase. With inheritance tax changes and rising care costs, advisers say there are structured options that can help the family meet its goals while managing risk.

Two advisers quoted by This Is Money weighed the key considerations for a “sandwich generation” family trying to support younger relatives without undermining the parent’s financial security. Patrick Haines, a chartered financial planner at Partners Wealth Management, stresses that protecting assets and planning across generations requires careful ownership and estate structuring. He notes that there are multiple routes, each with trade-offs, and underscores the importance of speaking with a solicitor who specializes in property law before finalising any arrangement.

One option is an outright gift of the reader’s planned investment to the daughter to purchase the property. If the reader survives seven years after the gift, the amount can fall outside the estate for inheritance tax purposes. However, living in the property rent-free after gifting could create a “gift with reservation of benefit” problem, potentially keeping it inside the reader’s estate for IHT unless a market rent is paid.

A second approach is to loan the £500,000 to the daughter rather than gifting it. The loan would keep the funds within the reader’s estate for IHT purposes, but the reader could still live in the property or use it as desired. In both the gift and loan scenarios, advisers highlight the potential role of a life assurance policy written into trust to cover any resulting IHT bill if needed, ensuring the daughter can continue to live in the home.

A third route is for the reader and daughter to own the property as tenants in common, each holding a defined share (for example, 60-40 or 50-50). This structure does not save on IHT, but it provides clearer control over who inherits each share via a will. It can also help protect the family’s interests if care costs arise, because a share may remain with the intended heirs instead of being automatically controlled by a surviving co-owner.

Under all three options, advisers say there is an opportunity to use equity-release products or a mortgage later on if the reader needs care and there are insufficient other assets to cover care costs. An equity-release loan would typically require meeting age and health criteria (you usually must be over 55), and interest can roll up over time. The loan could be repaid on the reader’s death or sale of the home, potentially funded by other assets in the estate. In some cases, a portion of the equity-release loan could be used to meet any IHT payable under options two and three, provided the daughter remains living in the home.

Lifestyle and succession planning considerations also come into play. A life assurance policy written into trust could provide liquidity to meet IHT bills, allowing the daughter to stay in the home without resorting to a loan to cover taxes. Ownership as tenants in common gives the most flexibility for passing shares to a grandchild or other beneficiaries via a will, but it does not automatically shield the property from IHT or local-authority care assessments without additional structuring.

Thompson also points out practical IHT basics the family should understand. Every individual has a tax-free IHT allowance of £325,000, and there can be an additional residence nil-rate band of up to £175,000 when a home is passed to a direct descendant. In theory, each person could pass up to £500,000 tax-free, though specific conditions apply, and allowances can sometimes be doubled when a spouse’s allowable amount is involved. A broader view of IHT requires considering the reader’s wider assets and any other available life-expectancy scenarios.

If residential care becomes necessary, local authorities may assess whether the reader’s share of the home should be counted toward care costs. A qualifying relative living in the home, such as a spouse, a child under 18, or a relative aged 60 or older (or who is incapacitated), can affect the assessment. If the daughter and grandchild do not meet the criteria, the authority may still consider disregarding the property if removing it would cause homelessness, but this is discretionary and not guaranteed. If capital exceeds about £23,250, the reader would typically be expected to self-fund care, though there are schemes such as Deferred Payment where the council places a charge on the property and care fees are paid later, usually at sale.

HM Revenue & Customs allows IHT to be paid in instalments over 10 years with interest, or executors can use a probate loan to cover IHT and repay it when the property is sold. In practice, careful planning and a combination of options can help reduce the risk that the daughter loses the home to care costs or IHT. The advisers emphasise that tax rules and care-cost rules are complex and highly fact-dependent, so professional guidance is essential.

Abigail Thompson, an independent financial adviser at Flying Colours, adds that ownership structure itself matters for estate planning. She explains that the two main options are joint tenancy, where both owners hold the whole property equally and a death transfers ownership automatically to the survivor, and tenancy in common, where ownership shares can be divided unequally and passed on by will. Because the goal is to protect the daughter’s and grandchild’s inheritance, tenancy in common is often preferable. It allows the reader to direct his share to his daughter, or even his grandchild, through a will, rather than risking automatic transfer to the other owner.

Thompson notes the IHT framework above and cautions that, if the reader gifts the property, the reservation rules could still apply if he continues to live there rent-free. Paying a market rent helps avoid that problem. In her view, the starting point should be a formal discussion with a solicitor and a qualified financial adviser to tailor the ownership structure to the reader’s health, wealth, and family circumstances. She also highlights that if funding care or passing assets, it is crucial to document how the property is owned and how proceeds would be used to support dependents.

This Is Money stresses that any plan should align with both short-term housing needs and long-term family protection. The goal is to enable the daughter and grandson to benefit from the parent’s work while reducing the risk that routine life events—like care costs or shifts in relationships—undermine the family’s ability to keep the home. The two advisers’ guidance also underscores that there is no one-size-fits-all solution; the best approach depends on the individuals involved, the value of the estate, and the evolving tax and care-cost landscape.

Those seeking to pursue this kind of arrangement are urged to engage early with legal and financial professionals who specialise in property ownership, tax, and elderly-care planning. The guidance notes that while planning can help protect a home and a family’s future, it does not replace professional advice or ongoing review as laws and personal circumstances evolve. For readers with questions about financial planning, This Is Money invites submissions for future columns and reminds readers that the published content is not regulated financial advice.