Gifting property to children has increased in popularity in recent years but, without professional advice, this generous gesture could have unintended consequences. This article summarises the tax implications and other considerations of gifting your property to your adult children.
A note on the budget
This article summarises the tax rules as they apply currently but they could change following the budget on 30 October. The chancellor has said that she needs to fill a £20 billion black hole in the public finances left by the previous government and, having committed not to raise income tax, national insurance and VAT for working people, there could be changes to inheritance tax, capital gains tax and stamp duty land tax on the horizon.
Can I gift property to my children?
If you own your property outright, you can gift it to your children, however, it is important to seek professional advice to ensure you understand the advantages, disadvantages and tax implications of doing so.
Why is gifting property to children so popular?
People gift their property to their children for various reasons but for many people the main reason is tax. Gifting your property to your children can reduce the value of your estate and, therefore, your liability to inheritance tax following your death. But inheritance tax is not the only tax that should be considered when considering gifting your property to your children.
Inheritance tax
If you gift your property to your children, this will be a potentially exempt transfer. This means that you will need to survive the gift by seven years for it to be outside of your estate for inheritance tax purposes; although, if you survive the gift by three or more years, taper relief may be available to reduce the inheritance tax due.
You should be aware, however, that if you gift your property to your children and use it rent-free following the gift, your property could be included in your estate for inheritance tax purposes even if you survive the gift by seven years. These are the gift with reservation of benefit rules and to avoid them applying, you may need to pay a market rent to your children for your use of your property.
Capital gains tax
Capital gains tax is charged on the increase or gain in the value of a property between the date it was acquired and the date it is disposed of. If you gift your property to your children, you will be subject to capital gains tax on the difference between the price you paid for your property and the market value of it at the date you gift it to your children.
If your property has been your home during your ownership, principal private residence relief may be available to exempt all or part of the gain. Any non-exempt gain above your allowance (currently £3,000) will be subject to capital gains tax at 18% or 24% depending on whether you are a basic or higher rate income taxpayer.
Any capital gains tax due must be reported to HM Revenue and Customs and paid within 60 days of the completion of the gift.
You should be aware, however, that if you gift your property to your children and use it rent-free following the gift, your property could be included in your estate for inheritance tax purposes even if you survive the gift by seven years. These are the gift with reservation of benefit rules and to avoid them applying, you may need to pay a market rent to your children for your use of your property.
Income tax
If you gift your property to your children and they receive rent from it, they may need to report the rent to HM Revenue and Customs and pay income tax on it.
Stamp duty land tax
Stamp duty land tax is charged on the consideration given in a property transaction. If you gift your property to your children for no consideration, there should be no stamp duty land tax to pay, however, if your property is mortgaged and your children take over some or all of the existing mortgage, this could be consideration for stamp duty land tax purposes.
Is it better to gift or inherit property?
This depends on your personal circumstances. For example, if the value of your property has increased significantly since you bought your property but your estate is still under your inheritance tax threshold, it may be better to keep your property. This is because the capital gains tax base cost of your property will reset on your death and your estate is unlikely to pay inheritance tax in any event.
If, however, your estate is above your inheritance tax threshold, it may be better to gift your property. This is because capital gains tax rates are lower than inheritance tax rates. You should be aware, however, that if you gift your property and do not survive the gift by seven years, you could be subject to both a capital gains tax charge and an inheritance tax charge.
What are the risks of gifting property?
If you gift your property to your children, it will become their property outright and they can deal with it as they please. This could have serious implications. In particular:
- If your children decide to sell your property, you could become homeless.
- If your children divorce, your property could be included in any financial settlements they agree with their spouses.
- If your children are declared bankrupt, your property could be used to pay their creditors.
In addition, if your local authority decides that you gifted your property to your children to avoid it being used to pay for your care, your local authority can treat you as though you still own your property when assessing you for local authority funded care.
Is gifting property the right choice for you?
Gifting your property to your children is a big decision and not one to be taken lightly. It could have serious implications for your financial independence and security. You should only consider gifting your property to your children if you are happy that you will still have enough resources to continue enjoying the standard of living you want to enjoy for the rest of your life.
Alternative options to gifting property to children
If gifting your property to your children is not the right choice for you, you could consider gifting a share, rather than the whole, of your property to them or putting your property into a trust. Each option has its own advantages, disadvantages and tax implications and it is important to seek professional advice.
How can Goughs help
At Goughs, we can explain the options for gifting your property to your children and the advantages, disadvantages and tax implications of each. Once you have chosen the right choice for you, we can help with the legal and reporting requirements to give effect to the gift. If you would like more information, please contact us today.
