There are a number of tax concerns to consider when you decide to either gift your property to your children or family members whilst you are alive or when you decide to leave your property to them in your Will.
What happens when you are given property in a Will?
You may find that you are a beneficiary under a Will where property has been left to you. As a beneficiary you can decide to either sell the property or have it transferred into your name (unless you hold the property as Joint Tenants).
Capital Gains Tax
One of the main tax concerns that your executors will need to bear in mind is Capital Gains Tax (CGT). The value of the property is determined at the date of death and there is a CGT uplift up to the date of death provided it was the deceased’s main residence. Should the property increase in value from the date of death value then this could incur CGT.
There are ways to mitigate any CGT liability in the following ways:
- Using your individual CGT allowance (currently £11,100) by appropriating the property to the beneficiaries before exchange of contracts on the sale. If more than one person is due to inherit the property then you can combine your CGT allowances together.
- You can deduct the costs of sale of the property (estate agent and solicitor fees)
- If you have improved the property in any way, such as extending the property, then this can also be deducted.
Maintenance and decorating are not deductible CGT expenses.
If you are leaving your property to a spouse or charity then there is no inheritance tax (IHT) payable.
If your property is left to anyone else, then it is included in your estate and potentially liable for IHT. The introduction of the RNRB for leaving your home to your children or grandchildren increases your tax free threshold to £425,000 (for more information please read our previous article regarding RNRB).
In the event that your estate is subject to paying IHT, then you will need to pay HMRC the tax due either from other assets the deceased has left to you, or from the sale proceeds of the property itself.
Similarly to CGT gains, if the property has increased in value from what was declared to HMRC, then additional IHT will need to be paid on the increase. If however, the property has sold for less than the date of death value, then you can reclaim the overpaid IHT.
What happens when you gift property before death?
Many testators attempt to alleviate potential inheritance tax charges on their property and decide to gift it to their children instead. There are conditions for gifting your property and making sure that it falls completely outside of your estate as well as tax considerations for the persons who are benefitting.
How can I gift property?
You must register with HM Land Registry when you have been given property and complete forms TR1 and AP1. These documents will need to be executed by all relevant parties and then sent to the Land Registry to allow them to change the names in the Proprietorship Register.
Once you have successfully gifted property there is no inheritance tax payable if you no longer continue to live in the property or receive any benefit from it for 7 years.
If you wish to continue to live in the property after gifting it away you must:
- Pay rent to the new owner (the owner will have to pay income tax on this at 20%)
- Pay your share of the household bills; and
- Live there for at least 7 years
You don’t have to pay rent to the new owners if both the following apply:
- You only give away part of your property
- The new owners also live at the property
If you die within 7 years of giving away all or part of your property, your home will be treated as a part of your estate and subject to 100% inheritance tax within the first three years of the gift which is slowly tapered until the 7 years are up.
Stamp Duty Land Tax
If property is given to you as a gift for no consideration or for less than £125,000, then there is potentially no stamp duty land tax (SDLT) to pay. If there is a mortgage on the property and you are taking over some or all of an existing mortgage, stamp duty would be due if the value of the mortgage is above the stamp duty threshold.
Capital Gains Tax
You do not pay CGT when you dispose of your home if it is your main residence and you have lived in the property for all the time you have owned it. You will automatically get a tax relief called Private Residence Relief. If you are disposing of property that is not your main residence such as a business premises or buy-to-let, then it will be treated differently for CGT.
The CGT is calculated on the difference between the purchase price and the property’s value when you make the gift. If you are a basic-rate taxpayer CGT is charged at 18%, if you are a higher rate taxpayer then CGT is charged at 28%.
As with disposing of inherited property under the terms of a will, you can also utilise your personal CGT allowance.
Dangers of gifting your property before you die
There are many problems besides tax that may arise when gifting your home. These are just some of the things you should consider:
- You should never gift your property unless you have the means to. If you are unable to maintain a standard of living that is acceptable, you should not decide to gift property simple to mitigate paying inheritance tax.
- The property will only become exempt from IHT after 7 years from the date of the gift as long as you have received no benefit from it.
- Once you gift property you are no longer the legal owner and you have no legal right to remain there. Although most people trust the new owners of the property, you may fall out with them in the future.
- If the new owners of the property become financially unstable or bankrupt, then you may lose the property.
Many clients wish to gift their home in order to protect the local authority from forcibly selling their property in order to pay for care home fees. If you are going or plan to go into residential care, then the local authority will check whether there has been a deliberate deprivation of assets. The local authority can carry out a financial assessment to determine the amount of funding you are entitled to and it takes into consideration not only your currently owned property but also previously owned assets as well. This means that any gifted property can also be included in their calculations.
If you would like more information on how Freeman Harris can assist you or your family with making a will or probate and estate administration, please contact our team on 020 7790 7311 or email us at firstname.lastname@example.org.