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What you need to know about gifting property in the UK

Gifting property is a popular estate planning technique but requires careful consideration before any action is taken. Key questions include:

·       How much control do you want to retain over the property?

·       Are you gifting property, or money to purchase a property?

·       Are you gifting to a child under 18?

·       Is the property a home, or an investment to be rented out?

Structuring a gift of property

You must make an outright gift passing all control of the asset to the recipient, who will then have the ability to sell or remortgage the property.

If you wish to retain a degree of control over the property, creating a structure to hold the property will be necessary, e.g. a company or a trust. In general, the greater the control retained, the greater the cost, both in tax and administration.

·       For example, if you gift into a trust (other than a bare trust) then amounts above the nil rate band (currently £325,000 per person) are usually charged to inheritance tax (IHT) at a rate of 20%.

·       An outright gift is usually a potentially exempt transfer (PET) for IHT. As long as you survive 7 years from the date of the gift, then it should be free of IHT.  If you do not live this long, IHT of up to 40% will be payable.

Gifting property vs gifting money

A gift of property will usually incur capital gains tax (CGT) even though no money is changing hands. This is because transfers between most family members are deemed to take place at market value.

Main residence relief – ensuring you are compliant

If you are gifting your home, main residence relief is available and should exempt any CGT gain. However, if you wish to continue to live in the property you must pay market rent. Failure to do this creates a ‘gift with reservation’, rendering the gift ineffective for IHT purposes.

As the recipient is not paying anything for the property no stamp duty land tax (SDLT) should be payable unless the gift results in the recipient taking responsibility for the mortgage, as this is treated as payment for SDLT purposes.

Understanding the implications of home ownership

The recipient of a gift of residential property is treated as a home owner. This has knock-on effects such as the loss of first-time buyer’s relief and/or the additional dwellings surcharge of 3% if the recipient buys further properties and continues to retain their interest.

Alternatively, you may wish to consider gifting money to your child or grandchild to allow them to purchase a property. This will avoid CGT issues, but they will pay SDLT on their purchase in the normal way and be treated as the purchaser.

What happens when recipients are under 18

Minor children cannot own property in their own name, so a structure must be used. The default position is that the property is held on bare trust, which gives a degree of control until the child turns 18, at which point they can do whatever they wish with the property.

Should control be required beyond the age of 18, the property will need to be held by another type of trust or company.

Note that gifting property does not mean that you can avoid SDLT and income tax and there are additional anti-avoidance measures for both. Broadly, this means that you are considered to be the purchaser and will be assessed for relevant taxes. For example, rental income would be taxed on you, rather than your child, until they turn 18.

However, these anti-avoidance measures do not apply to gifts from grandparents which makes ‘generation skipping gifts’ popular.

Use of the property

If the property will not be rented out, certain structures may become more costly. For example, residential properties used as a home that are held within companies are subject to punitive rates of tax under the ATED regime if they are worth over £500,000.

On the other hand, if a property is being rented out commercially then a trust structure may not be tax efficient, and the rental income could result in additional filings and therefore cost.

Protecting the family

As the gift will result in a major change to both your estate and that of the recipient, it is crucial to put wills in place, or to update your existing wills. This is particularly important if two or more people own the property as tenants in common – see more about this important consideration here.

Another key concern when making any large gift to a family member is how to protect it from potential future claims by a spouse or partner.  If you are thinking of making a gift, you and your children should decide how best to protect the property. This might involve a co-habitation agreement for unmarried couples, a pre-nuptial agreement for those who are yet to marry, or a post-nuptial agreement for those who are married.

Agreements such as these, although often viewed as unromantic, can open a constructive dialogue between couples. Engaging a solicitor early on can create the space to have guided, structured and clear conversations about these topics and arrive at a consensus that works for everybody.

These conversations can sometimes include members of the wider family when gifts are contemplated and siblings might be involved. Informed discussion and carefully recorded agreements is vital for those who wish to protect a property or other assets for the future.

Posted By Vincenzo Mazzone

15 February 2024

Vincenzo Mazzone