I want to cash in my savings and buy a house for me, my daughter and her family: Can I avoid a tax sting?

My daughter just had twins and already has a three-year-old son. Her family’s three-bed bungalow in Dorset is no longer big enough for all of them. They have been trying to sell it for eight months but cannot find a buyer. 

I am retired and have sold my bungalow on the Isle of Wight to be closer to her and help with my grandchildren. 

I have a lump sum of £375,000 from the sale, plus a private pension and savings with a total value of around £700,000.

My private pension is currently worth £292,000 and I have already taken the 25 per cent tax free amount but have not commenced drawdown yet so have included £175,000 in the £700,000 total mentioned above – the pension, minus 40 per cent tax.

I’m considering using these funds to buy a house with an annexe big enough for all of us, which I will own. 

This reader wants to buy a home to share with her daughter, while also giving money to her son

Once they have sold their bungalow, I will sell the property to them at around 50 per cent of its value, for which they will need a mortgage, and I will pay a market rent for my annexe where I will continue to live.

I’m intending to gift most of these proceeds to my son, to even things up, but am unsure how best to do this.

I’m in very good health and can see no reason not to survive for at least seven years.

I’m aware we will pay two lots of stamp duty and legal fees but am I missing anything else – I don’t want to be left with, or to leave, a big tax bill in the future. C.C, via email

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Harvey Dorset, of This is Money, replies: Sharing a home with adult children is becoming increasingly popular as families look for ways to pass on wealth earlier in life.

It seems you have a well thought out plan of how to do this, buying a property and with the intention to sell it to your daughter at a discount when she has the funds to pay.

Where your case might differ from others, is that you have a son whom you also want to leave money to, to make things fair for both him and your daughter.

Your concern is that you may find yourself liable for tax bills that you aren’t prepared for.

This is Money spoke to two experts to find out what you, and your children, could be liable to pay in the future and how you can prevent this from happening.

Tom Garsed-Bennet says gifting your house could affect your allowances

Tom Garsed-Bennet, independent financial adviser at Flying Colours, replies: Your question touches on a number of complex pension, property and tax areas.

You should seek professional advice, as each element has implications for you and your family. Although this isn’t a definitive and comprehensive response, I have set out some key points to be aware of below.

Encashing your remaining pension fund will likely mean that a significant amount of this fund will actually be taxed at 45 per cent. This is because the fund will be added to your income in the tax year you encash it, and any earnings above £125,000 will be taxed at 45 per cent. 

It might therefore be more efficient to draw these funds down over two or more tax years to reduce your income tax liability, although clearly this lengthens the time over which you are able to access the funds. 

You also need to factor in, and be comfortable with, the ‘tax cost’ of encashing your pension fund, and in using these funds for a property purchase rather than future retirement income.

You also need to think about any future costs and the money you might need to cover living expenses in later life.

The way in which you buy the property impacts the stamp duty rates you and your family might pay. If the property is bought in your name, you will pay stamp duty at normal rates. 

If, at a later date, you gift the property, there would then be a period of seven years for that sum to leave your estate for Inheritance Tax (IHT) purposes.

If your daughter and her husband were to buy the property in their names, with your capital, there would be an additional five per cent stamp duty to pay as they still own their main residence and therefore have a second home. 

However, they could reclaim the additional five per cent stamp duty if they sold their existing main residence within three years. 

If you purchased the property then gifted it, your daughter would not pay stamp duty on the gifted property as long as there was no outstanding mortgage on it and she was not taking on any other mortgage debt. 

If your daughter assumes part or all of any existing mortgage, she will need to pay stamp duty on the value of the mortgage she takes over, provided it exceeds the stamp duty threshold.

In terms of inheritance tax, you potentially have access to allowances which include the nil rate band and residence nil rate band, which could possibly allow you to pass on £500,000 to your descendants tax-free. You can read more about inheritance tax allowances here. 

The level of these will depend on whether you have made any gifts before, your marital status and property value, however. 

Gifting your house could affect your allowances, but as this is a complex area I would need to know more about your circumstances. 

Gifting funds to your son will not incur any immediate IHT liability, but the funds would be treated as a potentially exempt transfer and will remain in your estate for IHT purposes for seven years. If you were to die within that time, tax would be payable on a sliding scale depending how much time had elapsed. 

Setting up a trust might be something to consider, but would be more complex, and would only be advisable if there was justification for your son not to receive the funds outright, and you wanted to retain a degree of control over these funds.

There is a lot to think about here, and I haven’t covered everything, but taking advice before you act is something I would certainly recommend.

Charlotte Ransom warns that while some trusts are exempt from IHT, many are not

Charlotte Ransom, chief executive of Netwealth, replies: Your proposed plan – using your lump sum and pension assets to purchase a property with an annexe for shared living, followed by a sale to your daughter and son-in-law – may feel like a practical and emotionally rewarding solution, and it is thoughtful that you are also considering how to treat your son fairly. 

However, there are several financial and strategic considerations worth highlighting before you commit.

Since your daughter’s current bungalow has been on the market for eight months with little interest, it may be worth re-evaluating the asking price. 

A modest price reduction could stimulate buyer interest and help avoid the double set of stamp duty and legal fees that would arise under your plan to purchase a new property and then sell it on again. The extra transaction costs can be substantial, especially when buying at a higher price point.

As an alternative, you might consider renting a larger home on a temporary basis. While renting may feel like ‘money wasted,’ it could offer valuable breathing space and allow your daughter’s family to live more comfortably while their bungalow sells. 

This approach avoids locking in significant capital prematurely and reduces the risk of incurring stamp duty twice.

Cashing in your private pension in one go could be costly, with a tax bill of over £100,000. Instead, phased drawdown is worth exploring. 

By taking smaller withdrawals over a number of years, you may be able to keep more of your income within lower tax bands, potentially reducing your overall tax liability.

This method also gives you greater flexibility to support your family as needed, while preserving a larger pool of invested assets for the future. Maintaining some investment exposure may also help offset inflation over time, which is particularly relevant given you expect to have a long retirement horizon.

You are rightly mindful of fairness between your children. Starting to gift now – either to your son, or to both children in stages – means that the ‘seven-year clock’ for IHT purposes begins sooner.

Outright gifts are the simplest route, though you could consider placing assets into a trust if you want more control over how the money is used or if there are concerns about protecting wealth for future generations.

While some trusts are exempt from IHT, many are not, and there are also separate taxes you need to pay specifically on trusts. 

It’s worth considering too that placing money in a trust could limit the access you have to your money, and that exit charges of up to six per cent can apply.

The best approach depends on how much oversight you want and how complex you are comfortable making your financial arrangements.

Other practical considerations

• Mortgage eligibility: Before proceeding with your plan, confirm that your daughter and son-in-law will be able to secure a mortgage on the future property, especially as annexes and multi-generational homes can be treated differently by lenders.

• Tenancy arrangements: If you intend to pay rent for your annexe once they own the property, a formal tenancy agreement can provide clarity for all parties and may be relevant for care cost assessments in future.

• Capital Gains Tax (CGT): While your main residence is usually exempt from CGT, complexities can arise if ownership and occupation change. Professional advice will help clarify any risk in your scenario.

Your instinct to support your daughter and grandchildren while also planning fairly for your son is admirable. However, the financial decisions involved are significant and could have long-term implications for your retirement security, your tax position and your estate planning. 

I would strongly recommend seeking personalised professional advice to ensure you are structuring this in the most effective way – balancing family needs with financial prudence.