Gifting a property
Many people consider gifting a property for a variety of reasons, such as minimising inheritance tax, helping children to have their own home, planning for retirement etc. One of the most important areas to consider is the tax implications of gifting property.
What, on first glance, can seem like a straightforward transfer can actually have more far reaching implications with inheritance tax, capital gains tax and stamp duty all needing to be considered. Each of these areas are looked at in turn below, with some of the key points highlighted.
Inheritance Tax (IHT)
If the transfer of a property is made as an outright gift then it is classed as a ‘potentially exempt transfer’ for the purpose of IHT.
The property would fall back in to the estate for IHT purposes if the parent were to die within seven years of gifting. After seven years of making the gift, it would be outside the estate and there would be no IHT on it.
The gifts would need to be outright, i.e. the parent gives up the right to receive any rental income or a share in the proceeds.
Gifts with Reservation of Benefit
If the parent signs over the house but remains living in the property it is treated as a gift with reservation of benefit, i.e. the parent reserves the right to benefit from the property. The house will then remain part of the estate, even beyond the seven years.
If market rent is paid to the children, then it will take it out of IHT, although rental income received would be taxable income for the children.
Capital Gains Tax
If the property is not the principal primary residence of the parent, nor has it been at any point in the past, then Capital Gains Tax may be payable on transfer.
If the parent were then to die within the seven years and IHT is charged on the property, no relief is given for CGT already paid.
Deliberate Deprivation of Assets
The transfer may be viewed as a deliberate deprivation of assets to avoid residential care home fees. If the local authority deems this is the case they can reverse the transfer and include it when determining funding.
Stamp Duty
If no money changes hands then no stamp duty is due, however transfer of a mortgage can be classed as deemed consideration and trigger stamp duty.
Process
The gift should be evidenced in writing and the Land Registry entry would need to be changed.
If you would like any further information on gifting property, or to discuss your particular situation, please contact Jane or Jamie at Townend English on 01759 305989.
Jane Frith BSc PhD CA 5th May 2018