Is it Better to Gift or Inherit Property?

Gifting property to a loved one before you die can be a shrewd way to avoid owing a huge Inheritance Tax (IHT) bill on your estate when you die. For high-value estates, this can be very beneficial, but Inheritance Tax planning can be complicated and it is vitally important you understand the pros and cons of gifting property as opposed to inheriting it before making a decision.

The government recently announced that the tax-free allowance for IHT will be frozen until April 2028. As property prices continue to rise, this means that more people than ever will have to pay Inheritance Tax when their loved ones pass away. For those who are looking for ways to minimise their tax bill, tax planning has become increasingly important, and one strategy that may reduce the IHT bill for your loved ones after your death involves how you manage what is usually the most valuable asset in an estate - property.

Gifting a property to a child, grandchild or loved one can be a handy way to minimise the IHT bill by reducing the overall value of the estate - this may bring the value of the estate below the nil rate band of £325,000, or at least reduce the amount above the threshold on which you will owe IHT (at a rate of 40%).

Below, we explain what IHT is, the differences between gifting and inheriting property, and how Percy Hughes & Roberts can assist with drawing up a will, estate and tax planning, and administering an estate after death. If you have any further questions regarding IHT or you need services to help you minimise your liability, you can contact us by completing the enquiry form below or by calling 0151 666 9090.

What are the Inheritance Tax implications of gifting property?

Inheritance Tax is charged on any estate of a deceased person that is valued at more than £325,000.  IHT is due at a rate of 40% on any value above this threshold. This value of the estate comprises all of the deceased’s property, possessions, and money, minus any debts and funeral expenses. 

Assets that add to the value may include:

• Property

• Any savings and investments

• Valuable possessions such as cars and jewellery

Those that reduce the overall value may include:

• Unpaid bills

• Mortgage repayments or rental arrears

• Loans and other debts

Executors must calculate the value of the estate that has been left by the deceased and report this to HMRC. They are then responsible for paying taxes that are owed on the estate, including IHT. If there is an outstanding loan or mortgage, or other money owed to creditors, this may also need to be paid before any gifts are distributed.

Because the nil rate tax band for IHT is capped at £325,000, it can be beneficial to reduce the value of the estate by gifting a property before you die.

How do gifts work in relation to inheritance?

Unfortunately, you cannot simply gift property before you die to avoid owing IHT on your estate. There are tax implications of gifting a property and you should consider your plans carefully - in some cases, your tax liability could be higher, so it is important to speak to an expert during the estate planning process.

For example, IHT may still need to be paid on gifts you give to your loved ones during your lifetime. If you die within seven years of giving a gift to a loved one, it may still be factored into the value of your estate, and therefore will contribute to the IHT liability on your estate. This is referred to as the seven-year rule.

What is the seven-year rule?

If you gift property and pass away within seven years of handing the asset over, the beneficiary will need to pay tax on this asset (provided the overall value of your estate exceeds the tax-free threshold for IHT). Inheritance Tax bands are tapered on a sliding scale, depending on how long ago you gave the gift. This scale is:​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​

For this reason, parents and grandparents often gift their children property long before they believe they will pass away. This is to avoid paying IHT on the property by removing its value from the estate. There are several different arrangements that can make it convenient for family members to distribute assets in this way, avoiding IHT while still being able to live in the property or enjoy the profits of an asset.

You can read more in our detailed guide to the seven-year Inheritance Tax rule.

Are there exceptions that will help me avoid Inheritance Tax?

Gifts given fewer than seven years before you die may be liable for taxes or completely tax-free, depending on:

• Who the gift was given to, and their relationship to you
• The value of the gift
• When the gift was given

Gifts that may affect the value of your estate include:

• Property, land, or buildings
• Money
• Stocks and shares
• Possessions, such as cars and jewellery

Some gifts are exempt from Inheritance Tax, such as gifts between spouses and civil partners. You can gift as much as you like to them during your lifetime as long as they live in the UK permanently and you are legally married or in a civil partnership. Further, when married parents gift assets to their children, they can benefit from a higher tax-free threshold of £500,000. In some cases, a couple's IHT allowances will be added together.

In addition to this, you are allowed to gift up to £3,000 worth of money and possessions without paying tax each year. This annual exemption resets each tax year - speak to an expert solicitor to learn more about how these mechanisms could help you.

What is the difference between inheriting and gifting property?

The difference between inheriting and gifting comes down to when the beneficiary is given the property – before or after your death.

If you choose to leave your property to a beneficiary in your will, that property will make up part of the value of your estate, and is considered inheritance. You can read more in our guide on how much Inheritance Tax is in the UK and the rules around the threshold.

If you give a property or other asset to a friend or family member before you die, this is considered a gift. Gifting a property before you die can reduce your IHT liability. However, as we have explained, there are still tax implications for gifts and this includes not only IHT - yor gift may also be subject to Capital Gains Tax or other liabilities.

What is Capital Gains Tax?

When you gift a property, the gift will often be subject to Capital Gains Tax (CGT), especially given the continued growth of the residential property market in recent years. CGT is charged when you sell, gift, exchange or otherwise dispose of an asset and subsequently make a profit, or a “gain”.

If your beneficiary sells the property you give them and makes a profit, they will have to pay 18% CGT as a basic-rate taxpayer, or 28% as a high-rate taxpayer. The current Capital Gains Tax allowance for 2022-23 is £12,300. This is the amount of profit beneficiaries can make from a property before any tax is payable, and is charged on top of the gift tax you will also need to pay when giving away so large an asset as a property.

Capital Gains Tax is only relevant when you gift property, as beneficiaries do not pay CGT if they inherit property from an estate. They may have to pay CGT if they sell the property and it has increased in value since the date of the death. However, Capital Gains Tax is not payable when a residential property is your main residence, meaning that if your children inherit your home and move into it, they will not owe CGT if they decide to sell it later.