Gifting property has long been used by those with the assets available to help their children onto the property ladder and to reduce exposure to inheritance tax and capital gains tax. With fears that the Labour government may tighten the rules, gifting accelerated in the run-up to the Autumn Budget and will remain popular.
Whilst generous and in many instances a savvy tax move, it is not a gift to make lightly. Parents will need to consider whether that generous gift might need protecting and the tax implications.
Inheritance tax
A gift of property to a child will fall outside of an estate for inheritance tax (IHT) should the donor live for seven years (the Seven-Year Rule) after the gift is made. If they pass away within that seven-year window, IHT would be due albeit at a tapered rate.
To remove property from the IHT net any gift must be just that, an outright gift. This can leave mum and dad with no control over that asset going forward. There is nothing to stop a child from selling or re-mortgaging the property or losing an interest in it following, for example, a failed marriage. If any control over that property remains, HMRC may consider the property as still being within the parents’ estate.
It remains surprising that some believe they can avoid IHT on a property by gifting it to a child yet continuing to live and enjoy the home. HMRC considers this a ‘gift with reserved benefit’ meaning it will remain within the estate.
If a donor wishes to give the family home to a child yet continue to live in it, a full market rent must be paid. That will mean a child will face an income tax liability.
Capital gains tax
The Chancellor in her Budget increased the lower rate of CGT from 10% to 18% and the higher rate from 20% to 24%. She did not, however, increase the CGT rates on second homes, also at 24%.
Gifting property to a child will trigger a CGT liability unless it is the donor’s principal private residence. Because it is a gift with no cash changing hands, CGT is based on the property’s market value, with the gain based on the increase between the purchase and gift date. Capital improvement costs and fees incurred as a result of the gift can be deducted, reducing the tax paid, and any CGT liability must be paid within 30 days.
Stamp Duty
Stamp duty will not be payable on a gift of a property unless there is a mortgage on that property. Here, stamp duty will need to be paid on the value of the outstanding mortgage.
It should also be remembered that a child can only own property once they reach the age of 18. Gifts to children under the age of 18 will need to be made by way of a ‘bare trust’. The donor can be a trustee and retain some control over the property in that trust. Once that child turns 18, they will take ownership of that property and can use it as they wish.
When making a gift of property to children it is important to first take advice on how that gift can be made and the tax implications for both parents and the child.
Contact our Private Client Solicitors
If you are in need of advice or assistance on any of the legal issues mentioned in this article, please contact any member of our experienced Private Client team on 020 7631 4141 or email privateclient@bishopandsewell.co.uk
The above is accurate as at 27 November 2024. The information above may be subject to change.
The content of this note should not be considered legal advice and each matter should be considered on a case-by-case basis.
