I’m 70 and want to buy a home to live in with my son, how do we avoid it becoming an inheritance tax trap?

I am single and 70 years of age. I am in reasonable and active health, but I’ve seen some close friends slightly older than me decline rapidly.

I am about to buy a house that will enable my son and daughter-in-law to move in with me, so that I can be near my grandchildren.

I have £600,000 and the house costs £800,000 (we live close to London where house prices are very high). My son will put in £200,000.

This is a house that would then be suitable as a family home for them for the foreseeable future. 

They are happy for me to own the house 100 per cent to start with. However, I imagine in a few years’ time I would like to co-own the house with them legally. 

Am I correct that we can designate ownership 50/50, even if they effectively had only paid one quarter of the price?

This is Money spoke to two experts to find out how a reader can buy a shared home with their son (picture posed by models)

How would this affect them as far as inheritance tax when I die, or if I had to go into care? They insist that they won’t let that happen to me – but we can’t ever know what the future holds. 

I wouldn’t want to put myself into a position where I ended up in a very poor care situation, neither would I want this to mean my family are forced to sell up.

We will share the space and the bills equally 50/50. I anticipate future maintenance would be shared equally as far as is possible. 

It is possible that in future they may attempt to put more capital into the house via a mortgage, so that they have a greater share of ownership the house. 

My pension gives me enough income to cover essential bills and living costs, food etc with about £1,000 spare each month for eating out, holidays, leisure and sports activities, hobbies and furniture etc. I will have no other assets or savings. 

S.B, via email

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Harvey Dorset, of This is Money, replies: Multiple generational living as a way to share responsibilities, pass on wealth and ensure care costs don’t eat up an estate is becoming an increasingly popular idea.

However, if not done in the right way, your family could face a surprise inheritance tax bill, or the council could include your share of the home to fund later life care.

There are a number of ways to go about this, as you will see below, but the best option for you will depend on the balance you need to strike between supporting your own future and that of your family.

We spoke to two experts to find out what you need to know and consider.

Jonathan Halberda says that on your death, the value of your share of the property will normally be included in your estate for IHT

Jonathan Halberda, specialist financial adviser at Wesleyan Financial Services, replies: It’s great to see you thinking carefully about both your own future and your family’s security, before you take such an important step.

Having a full and in depth understanding of the impact of your decisions now have on you and your family in the future, is the only way to make the right decision. Here are a few things to consider:

1. Deciding who owns what and when

Ownership doesn’t have to match who paid what, so you can absolutely buy the property in just your name for now and then bring your son and daughter-in-law onto the deeds later.

The key is to document everything clearly, particularly if you decide on unequal shares.

A solicitor can help you set this up now and make changes in the future if circumstances evolve. For example, developing a ‘deed of trust’ will highlight who contributed what and how the proceeds should be divided if the house is ever sold, making sure everyone is protected and avoiding any misunderstandings down the line.

2. Treating the £200,000 as a loan or a gift

Your son’s contribution can be handled in two ways:

Loan to you: If you own the home 100 per cent and treat your son’s £200,000 as a loan this is the cleanest cut option. This would normally be repaid when you sell the house or from your estate when you pass away. This keeps the tax position straightforward, but he wouldn’t benefit from any growth in the property’s value.

Gift to you: If you treat it as a gift, there are potential inheritance tax (IHT) implications. If you were to pass away within seven years of the gift, it may still count towards your estate for IHT purposes, however after seven years, it falls outside of your estate completely.

3. Thinking about inheritance tax

On your death, the value of your share of the property will normally be included in your estate for IHT.

If you’re leaving it to direct descendants, they can benefit from the residence nil-rate band, which increases how much you can pass on before IHT applies.

If you gift part of the house while continuing to live there without paying full market rent, HMRC may treat it as a ‘gift with reservation of benefit’, meaning it still counts towards your estate for IHT purposes as HMRC can treat it as though it was never given away.

The ‘right’ way to approach this is solely dependent on your goals for your estate in the future. That’s why it’s important to take advice before making change, a financial planner can model different scenarios, so you know exactly where you stand.

4. If you need care in the future

It’s lovely that your family are so supportive, but as you’ve said, none of us can predict what life will bring.

If you ever need residential care, the local authority will likely include your share of the house when means-testing for fees.

If they think you’ve transferred ownership to avoid care fees, they can treat it as though you still owned the asset – this is called ‘deliberate deprivation of assets’.

So while co-ownership is perfectly fine, it won’t necessarily stop the house from being included in care assessments.

5. Protecting everyone and avoiding stress

The most important thing you can do right now is get everything in writing. This includes updating your will to reflect your wishes and considering a lasting power of attorney so someone you trust can make decisions if you ever can’t.

It’s always important to seek a solicitor to formalise any ownership agreement and ensure everyone understands what’s expected with bills, maintenance, and future changes.

Given the complexity, including balancing tax, legal, and family considerations, seeking specialist financial planning advice and legal advice before making decisions is key. 

An adviser can model different approaches (sole ownership, co-ownership, or loan arrangements) to show the long-term impact on your own financial security, inheritance planning, and potential care costs.

You’re doing something incredibly generous for your family, but it’s vital to protect your own financial security and future care needs too. With clear agreements and the right advice, you can create a plan that works for everyone.

The questions you need to consider 

Joshua Ryan says the first step would be to review your will to ensure that it is structured effectively and tax-efficiently

Joshua Ryan, principal associate at Weightmans LLP, replies: I am finding that co-ownership of properties is becoming increasingly popular, though these types of arrangements are not straightforward and specialist tax and legal advice should be sought from a reputable solicitor before proceeding.

1. My initial question relates to your son’s initial payment of £200,000 towards the purchase of the home. Does he consider the payment to be a gift to you, or is he treating this payment as an investment in the property (either by owning a share of the property or loaning funds to you so that you can purchase the property).

2. If this is a gift to you then you become the owner of the cash and, subsequently, the sole owner of the property. 

As you own the home, the value of the home would be included within any assessment for care home funding (and so would likely need to be sold in order to pay for your care fees) and it would also be subject to inheritance tax on your death (if payable – this would depend on your circumstances, and I do not have enough information to advise on this).

3. If you are the sole owner of the property, and your son funds investments or improves the house using his own money then he could claim an interest in the property. The value of his interest would correspond to his investment in the property when compared with your investment. 

Alternatively, if your plan is to own the property equally with your son then you might consider gifting a share of the property to him – this would ordinarily trigger a capital gains tax allowance, but I suspect that the capital gains tax liability might not be payable due to private residence relief. This would need to be considered.

4. If the £200,000 is to be an investment in the property then the solution would be to prepare a declaration of trust that confirms the split in the ownership of the property (i.e. your son owns a quarter of the property and you own the rest). 

It is possible to have ‘floating shares’ over the property – this would mean that your share of the property and your son’s share of the property would change over time and would factor in future payments made by you and your son for improvements to the property (or any other factors that you both agree to take into account).

5. In this scenario, your son’s share belongs to him. If he does not live in the property then when the property is sold, the gain made on his share of the property would be subject to capital gains tax. 

Equally, if this is his first property and he wishes to buy another property then he would need to pay the additional rate of Stamp Duty Land Tax (or if he owns another property then he would need to pay the additional rate of SDLT when this property is purchased). 

Finally, the risk to you is if something happens to your son’s circumstances e.g. a divorce – in these circumstances, your son’s share of the property would form part of the matrimonial pot.

6. Finally, it might be that your son is loaning the sum to you with interest (as you have indicated). In these circumstances, the interest would be subject to income tax and reportable in your son’s tax return, though it does mean that you own the property. If the loan is not repaid on death then it would be deductible from your estate for inheritance tax purposes.

There is no right or wrong answer, and I am afraid that I do not have all the information to provide you with the best option for you. Typically, tax and estate planning needs to be done holistically and the first step would be to review your will to ensure that it is structured effectively and tax-efficiently.

Your will would then factor in your ownership of your home, and the division of your home among your children (if your son is investing in the property, you might want to provide him with more of your estate than your other children). Equally, it is important to bear in mind your son’s circumstances and what would be the most advantageous position for his tax position too as this structuring could cause future issues.