Helping children or grandchildren onto the property ladder by gifting property sounds like a generous, forward-thinking move.
But without proper planning, you could end up facing avoidable tax liabilities.
Whether it’s your home, a rental property, or an additional asset, here’s what you need to consider before making that gift.
(Read Time: Approx. 5 minutes)
Topics Discussed:
- Key tax implications for gifting property to family members including children and partners
- Legal and financial issues including trusts, SDLT, IHT, CGT, and income tax
Stamp Duty Land Tax and Mortgage Transfers
Stamp Duty Land Tax (SDLT) applies if any money or debt is involved in the transfer. If you’re gifting a property and there’s no mortgage on it, then no SDLT is due.
However, if the person receiving the gift is taking on a mortgage or paying you anything, SDLT becomes payable based on the amount of debt transferred.
This also means if you buy a property with a mortgage and later gift it to your child, SDLT may be payable twice: once when you buy it, and again when your child assumes the mortgage.
In Scotland and Wales, similar rules apply under the Land and Buildings Transaction Tax and the Welsh Land Transaction Tax, with slightly different thresholds.
Understanding Capital Gains Tax When Gifting
Gifting a property doesn’t eliminate your obligation to pay Capital Gains Tax (CGT).
When you give a property away, the gain is based on the difference between what you originally paid for it and its current market value, even if no money changes hands.
Capital improvements and transaction costs such as stamp duty or legal fees can be deducted from the gain.
After deducting the annual exemption (currently £3,000), the remaining profit is taxed at 18% or 24% for residential property, depending on your income level.
There are two scenarios to consider:
- If you gift the property shortly after purchasing it and its value hasn’t increased, CGT is unlikely to apply.
- If the property was your main home, you may qualify for Private Residence Relief (PRR) to reduce or eliminate the CGT. Likewise, if your child or grandchild lives in the property as their main home after receiving it, they may also qualify for PRR when they sell it.
If CGT is due, the transaction must be reported to HMRC and the tax paid within 60 days of the transfer.
Inheritance Tax and the Seven-Year Rule
Gifting a property does not immediately remove it from your estate.
For the gift to be outside your estate for Inheritance Tax (IHT) purposes, you must live for at least seven years from the date of the gift.
If you pass away within that period, the property may still be counted as part of your estate and taxed at up to 40%, depending on the value.
There’s a sliding scale that offers some relief if you survive at least three but fewer than seven years.
However, if you continue to benefit from the property after gifting it (for example, by continuing to live there rent-free) HMRC will still consider it part of your estate.
Gifts to trusts may trigger an immediate IHT charge of 20% if the value exceeds the nil rate band of £325,000.
However, this band resets every seven years, allowing for further tax-free gifting down the line.
Income Tax Implications on Rental Properties
If you’re transferring a rental property, be aware of how this affects your and your child’s income tax.
For adult children, transferring the property allows them to benefit from their personal allowance and lower tax rates on rental income.
However, if your child is under 18, income over £100 a year from that gift is still taxed as your income, unless the gift came from a grandparent.
This rule limits the effectiveness of gifting rental income streams to minors.
Reducing your own income by giving away rental property may also affect things like pension contribution limits or mortgage eligibility.
Additional Considerations When Gifting
Before gifting part or all of your property, think beyond just the tax bill. Once the asset is gifted, it’s out of your control.
If the recipient later divorces or becomes bankrupt, the property could be lost to creditors or through a financial settlement.
Also, local authorities may still assess the value of gifted assets when calculating care home contributions, especially if the gift was made to deliberately reduce your estate value.
Alternatives to Gifting Property
In some cases, it may be more effective to gift rental income instead of the asset itself.
This allows you to retain control of the property while passing on some financial benefit.
Another option is to gift a share of the property rather than the whole.
This could provide your child with an income stream without triggering the full tax consequences of gifting the entire asset.
Summary
Gifting property to children or other family members can be a meaningful way to support their financial future, but it comes with a minefield of tax and legal implications.
If you’re considering making such a gift, make sure it’s structured in the most tax-efficient and legally secure way possible.
Get in touch with us here at Tax Expert for tailored guidance on gifting property to your family.
Fill out our form here for any questions, email us at info@taxexpert.co.uk, or message us on our WhatsApp for out of office hours.
Kind regards,
Ilyas Patel