Sam Dunn: 'Can we give our children the house and carry on living in it?'

Question: We're desperately looking for a way that our two children, both in their mid-20s, can get on the property ladder without saddling themselves with monumental debts. We wonder if we can literally give our largish family house to them and simply carry on living in it? It would mean that we wouldn't have to lend them huge sums for a deposit, and it would also protect our own savings. P Johnston, Kent

Answer: Your dilemma is by no means unusual as the number of parents forced to help their offspring buy is on the rise, but your proposed plan is. According to HM Revenue and Customs (HMRC), you can indeed literally hand over your home – regardless of its value – to your children.

That's the simple part: the complications and costs come next, much of them related to the taxman's fears over inheritance tax (IHT) avoidance. Under the 'seven-year rule', you can hand over any item – whether a cash sum or property, as in your case – to family or friends and it's free of IHT (payable at a hefty 40 per cent on any estate worth more than £325,000) as long as you live for at least another seven years afterwards. However, to prevent everyone following suit, HMRC has imposed some canny financial rules.

If you give your home to your children as a gift, but effectively carry on 'benefiting' from your largesse – i.e. you continue living in it, with them, for free – then it's classed as a 'gift with reservation of benefit'. This means that your generosity won't be exempt from IHT.

You would see your house included in your estate for tax purposes, making it a very expensive option if your property is worth a lot more than the inheritance threshold.

Essentially, you have a choice: pay your children as if you were 'renting' the house from them, or stump up what's known as 'pre-owned asset tax' (Poat). "In short, if you are not paying full market rent, you must pay this tax on the 'benefit' you are receiving," says a spokeswoman for the advice website Firstrungnow.com. Say the standard market rent for your family home, as judged by an estate agent, was £15,000 a year: you'd have to pay Poat of £3,000 if you're a basic-rate earner (20 per cent) or £6,000 if a higher earner (40 per cent). And that's not all. If you do pay your children rent, they must declare it as extra income – and pay more tax. Given its complex implications, it's worth hiring an accountant to ensure you don't ensnare yourself in a tax trap. Alternatively, why not simply persuade your children to hold off from property ownership?

"They're both very young for first-time buyers, and there's nothing to stop them saving for at least another few years to get a bigger deposit and a better home loan deal," says Melanie Bien at broker Savills Private Finance.

"The average age for first-time buyers is still 34, so they've a long way to go."