What are the tax implications of gifting a property?

Whether it is to help a loved one or to reduce an inheritance tax bill, many people want to know whether it makes financial sense to gift a property that they own. There are, however, several factors that need to be considered carefully before giving away a property.

There are four main taxes to consider when making a gift of property:

• Capital gains tax
• Stamp duty
• Inheritance tax
• Pre-owned asset tax

If you gift any asset, including a property, capital gains tax may be payable on any gain made. But if the asset is your home (and main residence), it is likely to qualify for principle private residence relief. This means that the gains are exempt for the proportion of the ownership period that it was your main residence.

Gifting a second property, such as a holiday home or a buy-to-let property, is likely to create a potential capital gains tax liability. This is an important consideration as there would be no capital gains tax if the property was held in your name throughout your lifetime and only transferred on your death. Capital gains tax is not payable on any assets, such as a property or shares, that are inherited when a person dies as the recipient will potentially pay inheritance tax on them instead. If you gift the property while you are still alive and then die within the next seven years, the recipient may pay both capital gains tax and inheritance tax on the property.

Capital gains tax on residential properties is charged at 18% or 28% depending on whether the gain falls into basic or higher-rate tax. This rate is higher than those applied to gains on other assets.

Stamp duty is generally not payable if there is no payment made for the property and there is no mortgage on the property being transferred.

If the recipient pays some money for the property or takes on the responsibility for a loan that exists on it, then stamp duty is potentially payable. The amount of stamp duty due will depend on the value of the property, whether it is their only property and other factors.

Giving away a property will only be effective in reducing your inheritance tax liability if it is an outright gift, with no continued access (meaning that you will not live in it, or if you do, you will pay rent at the market rate), and you survive for seven years after making the gift. If you gift your home but continue to live in it rent-free, then this will be seen as a gift with reservation of benefit and will continue to form part of your estate. For tax purposes, a gift with reservation of benefit occurs when someone gives a gift to another person, but still benefits from the gift after giving it away, for example, by living in it rent-free.

Additionally, the property will not be legally owned by you for the purpose of capital gains tax, so the new owners will pay capital gains tax on any gains made since they took ownership of the property if they decide to sell it, as principle private residence relief will not be available to them.

If you wish to gift your home in a tax-efficient way, you will need to either move out, or rent at the market rate, which the recipients would then need to declare for income tax purposes. There is an exception that enables you to give a share of your home away to someone who lives with you. Provided you pay your fair share of the costs of running the house, you would not be seen to be still benefitting from the property and inheritance tax would not be chargeable.

If the property you gift is not your home, for example a buy-to-let property or a holiday home, then gifting may be a little easier. You cannot gift a property and continue to use it or receive the income from it, but it may be easier to pay the new owner a fair rent if you use the property relatively infrequently.

Pre-owned asset tax was introduced to stop several contrived schemes used to avoid inheritance tax on people’s main residence. If you do find a way to gift your property and continue to benefit from the use of it in a way which avoids creating a gift with reservation of benefit for inheritance tax purposes, then there’s a fair chance that you will get caught by the POAT legislation. This would create an income tax liability.

Unfortunately, this can also catch people who are not trying to abuse the rules. For example, if a person sells their home and gives the cash to their child, who then uses that money to buy a bigger house which their parent can live in with them, then POAT may apply.

One of the main factors that needs to be considered is the affordability of gifting a property and the impact it may have on any rental income. All of the rental income would need to go to the new owner in order to avoid creating a reservation of benefit liability. This would reduce the income payable to you. A financial planner can help you to understand the financial implications of this by using cashflow modelling. You’ll be able to see if the loss of income is affordable both now and in the future.

Another important consideration if you are gifting a share of the property you are living in (or your surviving husband, wife or civil partner is living in if you make the gift via your Will) is how secure the home is from future issues such as divorce or bankruptcy of the new co-owner, or if the co-owner wishes to sell their share of the property. Although it may be beneficial from a tax perspective to co-own your home with your children, you need to give serious consideration to what would happen if things don’t go as planned.

Finally, another reason some people try to gift their property (either to an individual or to a trust) is to protect its value from assessment for care fees should they need to go into a care home. If the relevant local authority believes that someone has deliberately given away assets for this purpose, then the value of the property may still be taken into account due to the ‘deliberate deprivation’ rules. There is no time limit for these rules, so care needs to be taken.

The alternative to making gifts during your lifetime is to leave the property to your beneficiaries on death. If the gifted property is not your main residence, any capital gains tax liability is eliminated on death. However, the property will remain part of your estate for the purposes of inheritance tax.

In some circumstances, it may be better to leave a share of the property to a trust rather than outright to a beneficiary. This can be useful perhaps on a second marriage or relationship where you wish to protect the home for your surviving husband, wife or civil partner, but ultimately want your share of the property to go to your children from a previous relationship. It can also be a useful way to protect the value of half of the property should the surviving member of the marriage or civil partnership go into care or remarry. If you are leaving property into trust on death, then care needs to be taken that you do not waste your residence nil rate band unnecessarily by doing so.

In April 2017, the government introduced an additional inheritance tax nil rate band that could be used against the value of your home if it is left to your children or grandchildren on death – the residence nil rate band. The residence nil rate band is currently £175,000 per person and it is frozen at this amount until April 2028. If it is not used on death, it can be transferred to a surviving husband, wife or civil partner.

The rules around the residence nil rate band are complex and there are several criteria which need to be met. This means that many people will not benefit from the allowance. For example, if your estate is worth over £2 million, for every £2 your estate exceeds that threshold, you will lose £1 of the residence nil rate band.

A property is likely to be one of your largest assets. How you choose to pass it on is a crucial part of estate planning. If you would like help in deciding what the best option is for you and your family, book an initial consultation with one of our experts or call us on 020 7189 2400.

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