Gifting a property is an increasingly popular way of reducing the value of an estate for inheritance tax purposes., but there are other tax implications to consider and these vary according to whether you know the person you are giving the property to, their age and whether the property has a mortgage attached to it.
If a property is given away or sold at less than market value, any taxes will still be payable as if it was being paid for at market value, provided that the person receiving it is a “connected person”. This includes family members – children, parents, grandparents (though not cousins) – as well as family trusts and businesses that are controlled by the giver.
The only way this does not apply is if the sale is a “bargain at arms length” between two unconnected people, for example a distressed sale at auction.
Capital gains tax
Giving a property away is a disposal for capital gains tax purposes. It applies when you sell a property that has not been your main residence for the whole time you have owned it.
If the property has always been a buy-to-let, the tax is due on the entire period it has been owned by you. But if it has had a mixture of uses, such as a buy-to-let half the time and a main residence for the other half, the calculations are adjusted to match the split.
CGT is paid on the increase in the property’s value since it was bought, less expenses such as stamp duty and legal fees.
There is an annual allowance of £12,300. Any gain above this is taxed at 18% for a basic-rate taxpayer or 28% for a higher-rate taxpayer.
In the vast majority of cases CGT is not payable on gifts to a husband, wife, civil partner or charity, although there are a handful of exceptions.
Stamp duty is only payable by the receiver of the gift if the property has a mortgage attached to it.
If it does, the recipient, for example your daughter or son, will have to pay stamp duty on the outstanding value of the mortgage.
If the recipient already owns property – or in some cases, if the “buyer” and “seller” are married – stamp duty will be levied at the surcharge rate, which is three percentage points above the normal rate for the relevant band.
Make sure the lender knows about the gift, too, warned Nimesh Shah, a partner at accountancy firm Blick Rothenberg.
“You’ll need to check with the bank that you can give it away. Check the terms of your mortgage, because the lender may want to check that the person you’re giving the property to can afford the repayments,” he said.
When a rental property is given to a child who is under 18, the person who gave it away is still taxed on any rental income, even if that income technically goes to the child.
This will change when the child comes of age and does not apply if the person receiving the gift is an adult, whatever their relationship to the giver.
Inheritance tax is not payable on estates left entirely to a spouse, civil partner or charity.
For other loved ones, property gifts count as a “potentially exempt transfer” under the inheritance tax rules. This means they can be made inheritance tax-free as long as the giver lives for seven years afterwards.
After three years the tax amount falls – by eight percentage points each year from the full rate of 40% – until the eighth year, after which the property is out of the previous owner’s estate for tax purposes.
Each person has an inheritance tax allowance of £325,000, so if the entire estate, including the property, is worth less than this, there is no inheritance tax liability anyway.
Parents can also benefit from the residence nil rate band which increases their allowance when passing property to direct descendants.
This is currently worth an additional £175,000 for estates where a property which was the main or “family home” is passed to children, foster children, stepchildren or grandchildren. In such cases this brings the entire allowance to £500,000.
Adapted from an article from The Daily telegraph by Rachel Mortimer