Where a donor gives away legal title to an asset but retains an interest in it or continues to derive some benefit from the asset given away, the gift will be caught by the will rules on gifts with reservation.
Giving your house to your son and daughter and continuing to live in it will come under these regulations. This means that your estate will have to pay inheritance tax on the home even if you lived for seven years after giving it away and continue to do so up until your death.
If you or your husband continue to live in the house for some time after the date of gift but stop living in it before the last of you die, it is treated as a potentially exempt transfer.
This means it will be subject to inheritance tax if you don't survive seven years from the release of the reservation and is tax-free if you do. A widow, widower or bereaved civil partner automatically inherits the deceased's share of the house if they owned the home as 'joint tenants'.
There's no inheritance tax if they continue to live in it. So if one of you transfers his or her share on death to the other, no IHT is due.
Currently, the nil-rate band for IHT is £325,000. This means that estates valued beneath this amount are effectively exempt from IHT and although these rules apply, the nil-rate band extinguishes any tax liability. Your joint estate is currently valued at £190,000 and it is well covered by the nil-rate band of one spouse alone.
However, you still run a risk of your property appreciating beyond these limits and being subject to IHT. Conversely, any reduction in this exempt amount by successive governments may bring your estate into charge.
David Wesley-Yates is a chartered tax adviser at Red & Black Accountancy