Can I Gift My House to My Children?
Gifting a property to your children can be an effective way to minimise their Inheritance Tax liability. However, it is a decision that requires careful planning to avoid any potential legal or tax issues that can arise as a result. Here, we explain everything you need to know about gifting a property to your children.
Inheritance Tax is charged at 40% on estates worth more than £325,000. For this reason, many people consider alternative ways of gifting the most valuable assets in their estates to reduce how much tax they need to pay. Gifting property to a child or children can be a useful way to reduce the tax liabilities they will incur when they inherit your estate, and can also mean that your home stays in the family.
In this guide, we will explain how to gift a house to your children, detail all of the potential tax implications, and provide the steps you should take to begin the process. If you have any questions we have not answered, our expert wills and probate solicitors are happy to speak to you regarding your estate planning query and provide the legal services you need. You can contact us by completing the enquiry form on this page or by calling 0151 666 9090.
Can You Gift Property to Your Children?
Yes, you can gift a house that you own to your children. The most common way to gift property is by way of a "transfer for nil consideration" (or a “deed of gift”, as it is commonly known). This is often a way to reduce the amount of Inheritance Tax they need to pay.
Inheritance Tax is a one-off tax that must be paid within 6 months of a person's death. The tax is only paid on estates that are worth more than £325,000, and is charged at 40% on the value of the estate that exceeds this threshold. Giving money and property to family members as a gift while you are alive can help to reduce the value of your estate before you pass away and potentially avoid inheritance tax, or at least reduce your liability.
If you gift your child your home more than seven years before you die, the value of the property will not be included in the estate. For every passing year the amount of tax tapers off, like so:
|Years between gift and death||Tax paid|
|Fewer than 3||40%|
|3 to 4||32%|
|4 to 5||24%|
|5 to 6||16%|
|6 to 7||8%|
|7 or more||0%|
Are There Any Conditions I Must Meet Before Gifting a Property?
Yes, in order to gift your property to your children, you first must:
- Be of sound mind and not acting under pressure
- Be listed as the owner with the HM Land Registry (HMLR)
- Have no outstanding mortgage on the property (if you do, you can transfer equity instead)
- Ensure there is no charge secured against the property
What Are the Tax Implications of Gifting Property to my Children?
Using a transfer to gift your child a property means that no money changes hands during the transfer of ownership. In this scenario, the owner of the property surrenders their interest in the property to their child and receives no monetary consideration.
As we have said above, the primary benefit of transferring property ownership is to decrease your inheritance tax liability. Gifting a property at least 7 years before you die can reduce the value of your estate, therefore reducing or negating the amount of inheritance tax your children will need to pay. This is referred to as the seven-year rule and is an important element of estate planning.
However, there are some other taxes that you and your children may need to pay when you transfer property. Below are some of the factors that may apply to your circumstances:
Capital Gains Tax (CGT)
If the property you are gifting is a second home or a holiday home, you may need to pay capital gains tax. CGT is charged on any increase in value that a property experiences between when you first buy it and when you transfer ownership, provided it is not your main residence.
The first £12,300 of this increased value is tax-free. You will pay a rate of 18% or 28% on the value that exceeds this threshold (depending on whether you are a basic rate or higher rate taxpayer) for a residential property.
Your child may also be liable to pay capital gains tax if they eventually sell the property.
If your children rent the property out, they will be required to pay Income Tax on the rental income they receive.
If there is no mortgage left to pay on the property when you are transferring ownership, your children will not need to pay any Stamp Duty.
Stamp Duty Land Tax will be only due if the value of the mortgage is above the current threshold, which is set at £250,000 for residential properties and £150,000 for non-residential properties.
Will I Have to Move Out of the Property?
You are able to stay in the property once you have gifted it to your children. However, this is on the basis that you:
- Pay rent at the same rate as similar local rental properties; and
- Pay bills.
If you continue to live in the gifted property rent-free after you have transferred ownership, the property will not be exempt from Inheritance Tax.
Can a Conveyancer Handle the Gifting of a Property?
It is common practice to instruct a solicitor when transferring property. Solicitors can advise on the deed of gift process and handle any HM Land Registry paperwork or potential Stamp Duty administration that is required.
At Percy Hughes & Roberts, our team has significant experience in estate planning and in managing property transfers between parents and children. Our expert wills and probate department can help with estate planning and draw up a Deed of Gift, while our skilled property conveyancing team can manage the transfer of ownership to ensure that all of your legal obligations are met.
Are There Risks When Gifting Property to my Children?
As this is a permanent transfer of a property, there is some risk involved. Gifting your house to your children means you are no longer the homeowner, and you give up any legal rights to the property. This is not always a problem, but it can put you in a vulnerable position if you intend to keep living in the property.
For example, your children could decide to evict you from the property if they intend to sell it, or as the result of a family disagreement. Additionally, if your child is married and they fall out with their spouse, the property could be sold against your family’s wishes as part of a divorce settlement.
As with any important life decision, you will need to think about the major implications of gifting your home to your child before you move ahead with this plan.
Alternatives to Gifting Property to Children
There are some alternatives to gifting property to children in this way that can still reduce the Inheritance Tax they will owe:
Sell the property and gift the proceeds to your children
Rather than transfer the property, it may be simpler to sell the property yourself and gift the proceeds from the sale to your children. In such cases, the money earned by selling the home would still be subject to Inheritance Tax if you were to pass away within seven years of the gift.
Transfer of Equity
In this scenario, one or more of the original owners remain on the legal title, while one or more children are added as co-owners.
This is usually done when there is a mortgage on the property, as you would need to pay Stamp Duty if you transferred ownership entirely. You will need to consult your mortgage lender to guarantee that the mortgage will still be paid once the child is added. A conveyancer will be responsible for logging the changed details of ownership of the land registry.
You will also need to decide whether you and your child are tenants in common or joint tenants. Our expert solicitors can advise on this.
Life Interest Trust
In a life interest trust, the entitlement to an asset is split into its capital and income benefits, with the capital representing the value of the property and the income benefits usually representing rental income. You and your spouse would hold a separate share in the property, usually 50% each, and would be considered "life tenants", which means you are entitled to the income from the assets in the life interest trust.
Under normal circumstances, when one person dies, ownership of the property (the capital) would transfer to the surviving spouse or civil partner. However, with a life interest trust, the capital is protected and will pass to the ultimate beneficiaries, usually your children, once all of the life tenants pass away.
Concessionary Purchase (Transaction Under Value)
A concessionary purchase means selling your property to your child for less than its current market value. You can sell the property to your child at a price they can more easily afford and keep the property in the family.
However, you will need to inform your mortgage lender that the property is being sold for less than its market value; otherwise, the mortgage offer could be rescinded.
In addition to this, if your children later decide to sell the property, they may have to pay a large amount of capital gains tax because the market value will often have increased significantly compared to the reduced price they paid for the property in the first instance (beyond the tax-free allowance of £12,300).
How Can Percy Hughes & Roberts Help?
At Percy Hughes & Roberts Solicitors, we have a team of dedicated wills and probate solicitors who are ready to help you resolve your query or issue relating to this area of the law as quickly and effectively as possible.
Gifting a house to your children can be a handy way to minimise the potential Inheritance Tax bill that your family could incur when you die. Using a Deed of Gift can transfer the ownership of property without any money changing hands, but is only suitable in certain circumstances. Our talented team of wills and probate solicitors can advise you on whether a deed of gift could help to reduce your tax liability, guide you through the process, and assist with other areas of estate planning.
We can also help to ensure the correct procedures are followed and make you aware of the tax implications that could arise when gifting or transferring property, so that you understand your options before you make a decision.
If you would like to contact one of our expert wills and probate solicitors you can do so by calling 0151 666 9090 or by completing the “Get in touch” form on this site.
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