Protecting your heirs from burdensome inheritance tax bills is a growing priority for many families.
With rising property values and changes in tax regulations, gifting property has become an increasingly popular strategy.
However, without proper planning, this approach can backfire.
(Read Time: Approx. 4 minutes)
Topics Discussed:
- Key tax implications of gifting property, including inheritance tax, capital gains tax, and stamp duty.
- Strategies to ensure compliance with tax regulations while maximising benefits for your heirs.
Why Property Gifting is On the Rise
With property often being the largest asset in an estate, gifting homes to children or other heirs is becoming more common.
Recent figures show that property gifting has surged, with 152,000 homes transferred in 2023 and projections pointing to 220,000 for the current year.
This trend is driven by increased inheritance tax burdens, with freezes on tax-free allowances until 2030 exacerbating the issue.
Inheritance tax applies to estates worth over £325,000, with an additional residence nil-rate band of £175,000 for direct descendants.
Couples can combine their allowances for up to £1 million tax-free.
Despite these thresholds, rising property values have pushed many families into taxable brackets.
Passing on a Home
Transferring a home to your spouse or civil partner when you die is free of inheritance tax.
However, if you leave it to another person in your will, its value will count toward the taxable estate.
If you own your home (or part of it), your tax-free threshold can increase to £500,000 if:
- You leave it to your children (including adopted, foster, or stepchildren) or grandchildren.
- Your estate is worth less than £2 million.
For gifts during your lifetime, there is no inheritance tax to pay if you move out and live for another seven years.
However, to continue living in the property after gifting it, you must:
- Pay market-rate rent to the new owner.
- Pay your share of bills.
You don’t need to pay rent if:
- You only gift part of the property.
- The new owners live in the property as well.
If you pass away within seven years of gifting the property, it will be treated as a gift, and inheritance tax may apply under the seven-year rule.
The 7-Year Rule for Gifting Property
To successfully exclude a gifted property from your taxable estate, you must outlive the gift by at least seven years.
This is known as the “seven-year rule.”
If you pass away within this period, the property remains part of your estate, with inheritance tax tapering from 32% in year three to 8% in year seven.
Starting early is critical to maximising your chances of avoiding these taxes.
Example: A couple with a £1.3 million estate could eliminate a potential £120,000 tax bill by gifting their £300,000 home in compliance with these rules.
Avoiding Common Tax Pitfalls
Continued Benefit from the Property
If you continue to live in the property after gifting it, the transfer may be deemed a “gift with reservation of benefit.”
This means the property will still be included in your estate for tax purposes unless you pay market-rate rent to your heirs.
This rent must be documented and consistently paid to prevent complications with HMRC.
Capital Gains Tax (CGT) Concerns
If the gifted property is not your primary residence, capital gains tax may apply.
The transfer is treated as a disposal, with tax calculated on the market value at the time of the gift.
While direct descendants can benefit from reliefs, it’s crucial to understand how CGT might impact the recipient if they later sell the property.
Stamp Duty Land Tax (SDLT)
If the property has an outstanding mortgage, SDLT may apply on the value of the debt transferred.
Additional charges, including the 3% surcharge for second homes, can add further complexities.
Special Considerations
Property gifting can also influence assessments for care fees.
If a council deems the gift as an attempt to avoid paying for care, the property may still be included in your financial evaluation, leading to higher care costs.
Ensure your gifting plan aligns with long-term financial strategies to avoid these pitfalls.
The Role of Professional Guidance
While the prospect of saving on inheritance tax is appealing, navigating the maze of associated regulations requires expertise.
From crafting deeds of gift to ensuring compliance with the seven-year rule, legal and financial professionals can help safeguard your assets while minimising tax exposure.
Summary
Gifting property is a powerful tool for reducing inheritance tax liabilities, but it demands careful planning.
Understanding the rules around continued benefits, the 7-year timeline, and associated taxes is essential.
By consulting with experts at Tax Expert, you can optimise your strategy and protect your heirs from unnecessary tax burdens.
Fill out our form here for any questions, give us a call at 01772 788200, or message us on our WhatsApp for out of office hours.
Kind regards,
Ilyas Patel