Probate and estate planning
The tax implications of gifting property to children
There are numerous reasons one might want to transfer the ownership of a property to their child. Gifting properties to your children can be a complex matter as there are many tax considerations involved in relation to capital gains tax, inheritance tax and stamp duty land tax when you are planning to do so.
Capital gains tax
A gift of property is subject to capital gains tax (CGT), which is charged on any profit arising, or treated as arising, on the gift. It is the person selling or gifting the property who would be liable to pay the CGT and not the receiver of the gift.
Where a gift is made to a close family member, the market value of the asset is used instead of actual purchase price (which if often zero), and CGT is charged on the gain which is deemed to arise. CGT is calculated based on increase in value arising between the date of acquisition and the date of disposal, less any capital improvement costs and any associated costs of purchase or gift, such as legal fees, SDLT, and estate-agent’s fees.
For the 2022/2023 tax year, there is an annual allowance of £12,300 on capital gains, which is tax-free. The balance is taxed at the appropriate tax rate. This is dependent on whether you are a basic rate taxpayer or a higher/additional rate taxpayer. The gain is taxed through the bands, and therefore a combined rate may apply.
Type of property/land Rate of CGT: Basic Rate Taxpayer Rate of CGT: Higher/Additional Rate Taxpayer
|Type of property/land||Rate of CGT: Basic Rate Taxpayer||Rate of CGT: Higher/Additional Rate Taxpayer|
If the property is bought and gifted immediately to a child, then there should be no taxable gain on the basis there is no increase in value between the dates of purchase and gift.
Where the property gifted was the donor’s main resident, you may consider Principal Private Residence (PPR) relief, which may exempt some or all of the gains from CGT. Additionally, if the recipient then lives in the property as their main residence, they may also qualify for PPR relief when they come to sell the property.
For disposals of UK residential properties by non-residents where you owned the property before 6 April 2015 the standard approach for calculating the gain is to use the market value on 5 April 2015.
With regards to commercial property disposals by non-residents, if you owned the asset before 6 April 2019, the standard approach for working out the gain is to use the market value on 5 April 2019.
It is noted that disposals of UK residential property must be reported to HMRC within 60 days of completion/gift and any tax that is payable is also due. This does not apply to commercial properties.
There is no 60-day reporting requirement where no tax arises on the disposal. This may be the case where:
- The disposal is a ‘no gain, no loss’ transfer between spouses or civil partners.
- Any gain arising on the disposal will be fully covered by exemptions, for example the annual exemption or Private Residence Relief; or
- The property is being sold at a loss or nil gain.
However, in certain circumstances, it may be beneficial to file a return to claim the loss with HMRC. This exemption does not apply to a non-UK resident.
Anyone who is planning on selling or gifting residential property should consider getting in touch with their tax advisor to ascertain whether there is a reporting requirement under the 60-day rules.
Would you be required to pay SDLT on gifted property?
It depends on whether there is a mortgage on the house. Your child will not have to pay stamp duty land tax (SDLT) if there is no mortgage. If there is, they will have to pay stamp duty on the value of the outstanding loan.
You need to seek agreement from your bank or building society on the transfer of equity before you can give it away, as they will likely check whether the recipient will be able to afford the mortgage repayments.
They might not agree to do this if your child has no income or earning a lot less than you, but you can consider acting as a guarantor on the mortgage.
When someone dies, inheritance tax can be charged at a maximum rate of 40% on your estate of the estate value above £325,000 (or £500,000 where a main residential property is passed on death to a lineal descendant such as children or grandchildren and the total value of the estate is less than £2 million). An estate generally includes all property, savings and any possessions. Therefore, it is worth planning ahead to gift assets surplus to requirements during an individual’s lifetime to reduce the value of the estate.
There is normally no inheritance tax to pay if the donor survives seven years from the date of the gift. Where the donor survives at least three years, but less than the full seven years, a tapered IHT rate applies. See the table below:
|Years between gift and death||Rate of tax on the gift|
|3 to 4 years||32%|
|4 to 5 years||24%|
|5 to 6 years||16%|
|6 to 7 years||8%|
|7 or more||0%|
However, if the donor retains an interest in the property, i.e. gift their family home to children but continues to live in it this is considered as a ‘gift with reservation of benefit’. If this is the case, the property remains in their estate, which will be taxed in full on death. The donor can pay the children the full market rate rent to successfully remove the property from their estate. The recipient/s may be subject to income tax on the rent received. Partial gifts of property are also possible and, in those circumstances, it would be advisable for the recipient of the gift to pay their gifted share of the property’s running costs as otherwise, HMRC could argue there has been no proper transfer of ownership.
One could consider gifting a rental property that has income to children, to fully utilise their income tax personal allowance and their lower tax rate bands. However, where parents gift assets to children aged under 18 years old, any net income exceeding £100 per annum is taxed on the parents as if they still owned the asset, under the parental settlements rules. This rule does not apply to income generated when gifts are from grandparents.
Children under the age of 18 years old are not legally able to own real estate in their own name and so you might need to consider using a trust structure such as ‘bare trust’ or a more formal structure to hold property, with an adult acting on their behalf. Under a bare trust, the asset and any income net of tax legally belongs to the child. They are then able to use it without the restriction of parental consent once they reach the age of 18.
A formal trust is a legal entity in its own right and the donor can be a trustee and retain an element of discretion over the assets. Most trusts must be formally registered with HMRC now, on the Trust Register.
If the gift is made to adult children, the property is immediately outside the donor’s control and therefore, if gifting part or all of the family house, it is precautionary to consider the longer-term effects of divorce or risk of bankruptcy within the family, which can result in the loss of the property.
Summary planning points
Depending on the reasons behind the gift of the property, you may consider the following planning points:
- Gifting the post-tax rental income instead, if the donor wishes to retain ownership and control of the asset.
- Gift a proportion of the property to an adult child, this way, although there are tax issues as discussed above, it provides an income stream equal to their percentage ownership of the asset. Children can use their personal allowance or lower tax rate to fully utilities the tax benefits.
- If you gift your main home to one of your children, you are no longer the homeowner and have no rights to the property. If PPR applies, then there are no CGT consequence and no SDLT payable on the basis that there is no mortgage on the property.
- A gift of an investment property would, in most cases, be preferable as it does not mean giving up the family home, albeit this can often work well where elderly parents have to move into full time care.
In summary, gifting properties to your children can be a complex matter as there are many tax considerations involved, therefore it is best to consult a professional tax advisor before you take any actions.