24 Feb
Gifting Property To Children – the Ultimate Guide
There are many important decisions that parents need to take in their lifetime for their children – one of the most important being gifting their properties and assets. Gifting a property to your children can be a good idea, but there are some things you need to think about first.
Even though selling a home may seem simple, you need to think about the taxes you may have to pay. The main taxes are Capital Gains Tax, Stamp Duty Land Tax, and Inheritance Tax.
Gifting Property to the children
Gifting is a way to transfer property to your children. Usually, parents do this to protect their children from losing out on inheritance tax after they die, and to provide them with a regular income.
Inheritance tax is levied at a rate of 40% on all property, including the principal home. Individuals are entitled to an exemption called the Nil Rate Band (NRB) of £325,000 for IHT purposes (for the tax year 2020-21).
Furthermore, if the specified criteria are fulfilled, there is a separate allowance called “Residence Nil Rate Band (RNRB)” of £175,000 (for the tax year 2020-21). As a result, parents may transfer up to £1 million worth of property to their children without worrying about inheritance taxes.
There are multiple Inheritance Tax (IHT) implications to consider before transferring property to your children –
- A gift of a home is typically a potentially exempt transfer (PET), which means that if the donor survives for seven years, the children will not have to pay inheritance tax because the property will be outside the donor’s estate. Please keep in mind that a gift to charity must be a non-reservation able Gift Without Ownership, which means the donor will not profit from the item after he or she has given it and HMRC may attempt to collect IHT.
- If the donor dies within three years of making a gift of property, the PET becomes a taxable asset and the property is added to his or her estate, with full inheritance tax applying at 40% to it after deducting any NRB and RNRB payments.
- If the donor’s death occurs more than three years after giving the property, IHT is paid on a sliding scale due to ‘tapered relief.’ If the cumulative value of gifts given in the last seven years prior to a donor’s death exceeds £325,000 (i.e., IHT NRB), relief will be tapered. The following are the tapered relief rates
| Years Between Gift & Death | Tax Rate |
|---|---|
| Less Than 3 Years | 40% |
| 3-4 years | 32% |
| 4-5 years | 24% |
| 5-6 years | 16% |
| 6-7 years | 8% |
| 7 years or above | 0% |
You can’t live in your home rent-free after giving it to your children. If the rent is not paid at commercial levels, the property gift will be considered a gift with reservation and will not qualify for PET, therefore necessitating inheritance tax paid by you. You must pay market-rate rent in your region.
Other Tax Considerations
You must also take into account the impact of below-taxes mortgages when gifting a home in addition to the IHT:
Capital Gains Tax (CGT)
The gift of a buy-to-let property to the children or an affiliated party is considered a market value transfer for CGT purposes. As a result, if any taxable gains arise on the property, they will immediately crystallize and the CGT will be due within 30 days after completion. If the property being transferred is your primary residence, you won’t have to pay capital gains tax if most of the profits are likely to qualify for PRR relief.
The CGT owed on the transfer of a property to a minor is calculated by deducting the market value of the property at the time of gift from the purchase price or total consideration paid for it, including capital improvements and legal costs incurred on it.
The recipient of a gift, sometimes known as the donor, is liable for CGT. The donor may agree with HMRC to pay the CGT in 10 equal instalments if the property is a gift with no consideration received by the donor.
Another choice is to invest the notional profit from the property into shares of a company authorized for the Enterprise Investment Scheme (EIS) to defer capital gains taxes, which means no CGT will be due when the funds are invested. You may get further income tax relief at 30% if you invest the money in EIS for at least three years under EIS. The investment will be eligible for inheritance benefits depending on the scheme available after investing in EIS for two years.
Stamp Duty Land Tax (SDLT)
Stamp duty land tax is paid on the property’s value, rather than the equity transfer. If there is no money exchanged for the property and the transaction is a pure gift, Stamp Duty Land Tax (or its equivalent in Scotland and Wales) generally isn’t charged.
However, if there is an outstanding mortgage on the property, it might be subject to SDLT. When a donor transfers the outstanding mortgage on the property to the donee (the person receiving the gift) with the property, and the value of that mortgage is more than or equal to the SDLT nil-rate threshold, the transaction will be subject to SDLT. The SDLT is credited 14 days after the work has been completed.
Different ways of Gifting a Property
The process of transferring property to one’s children is complicated. After you’ve figured out the tax consequences, it’s time to choose a strategy for handing over the home to your kids.
The four most popular methods for transferring property to children are as follows:
- Selling property to the children at full market value
- Children are being offered significantly reduced (below market) prices for property.
- By executing a deed of gift, you can transfer property.
If you’re selling a home for full market value, proceed with the normal sale and purchase process. If you’re selling a property for less than market value with some consideration, go with the standard sale and purchase procedure. CGT will be applied to the full market value of the property, regardless of any consideration received as children are considered connected parties for CGT purposes.
In the cases I’ve outlined above, we have yet to see a court take action against individuals who are trying to avoid gift tax by moving their property into something that resembles a business.
The Legal process of Gifting a Property
Sale and purchase
- When a property is sold for full market value or less, the typical sale and purchase procedure must be followed. The process is as follows:
- Both the buyer and seller will require an independent solicitor. The seller must complete a variety of standard protocol forms, such as Fittings and Contents Forms.
- seller makes an offer for a buyer’s mortgage (if applicable).
- The buyer places a request for searches.
- Now you need to make a few more preparations before you can exchange or complete your transaction.
In the UK, it takes anywhere from 4 to 6 weeks for a standard mortgage application. If the property is leasehold, the time taken for completing the entire procedure might range from 4 to 6 weeks, but it may take longer.
Transfer by deed of gift
When a real estate property is gifted via a deed of gift, the following procedure is followed:
- Ownership is transferred to new owners, who are appointed a solicitor.
- Both current and incoming owners have their names drawn and TR1 is sent to them.
- A solicitor will check the ID1 form of current owners to complete the process.
This technique is faster (usually 2 to 3 weeks) and less time-consuming than the traditional sale and purchase procedure.
Follow these four steps to create an offer for the most probable buyer (who is also typically your second choice) in order to get a price that’s more lucrative than the sale and purchase bid.
1. Look for a buyer who is willing to pay more than the sale and purchase bid.
2. Find a buyer who you would be happy with, even if they are not your first choice.
3. Make sure the buyer is willing to pay more than the sale and purchase bid.
4. Get the buyer to agree to purchase the property subject to contract.
FAQ
To give your home to your children in your will is the most straightforward approach. Your estate will not be taxed if the total value of your assets is less than $12.06 million (in 2022).
Another method of gifting property without paying capital gains tax is to give your main home to one of your children. This allows you to claim private residence relief, which is different from the residential exemption.
Your account will be adjusted as though you made a gift equal to the difference between FMV and the selling price. For instance, if your home is worth $700,000 and you sell it to your child for $350,000, you’ve just given a donation of $350,000. Yes, of course, you may take advantage of your annual gift tax exclusion.
If you’re selling for less than market value and accepting consideration, that’s fine under the law. If your intentions are pure and you don’t expect anything in return, however, then gifting is preferable because there will be no capital gains tax. On the other hand, gifting a property incurs some administrative costs.
Yes, you can give your home as a gift to your child and continue living there until you die or they sell it. You’re allowed one main residence exemption per person (or per married couple), so if you have more than one child, they’ll each need to own their own home.
A deed of gift is a formal document that transfers the ownership of property from one person to another. It must be signed by both parties and can be used for any type of asset, not just real estate. Gifting a property via a deed of gift is quick and simple, as there are no tax or stamp duty implications for the receiver.
Selling your home to a relative may be preferable because you’ll get paid in cash, and you won’t have to pay realtor fees, capital gains tax or any other taxes. It’s important to make sure there is a written agreement in place that outlines the price, terms and conditions of the sale. This will protect both you and your relative in case things go wrong.
A transfer of equity occurs when the ownership of a property changes hands but the mortgage remains with the original owner. This can be useful if you want to gift your home to someone but don’t want them to take on the responsibility of the mortgage. The new owner will need to be approved by the lender and will have to start making mortgage payments once the transfer of equity is complete.
You’ll still be liable for any capital gains tax on your gift, as well as inheritance tax if you’re giving it away and die within seven years. If your home has increased in value since you bought it, then you’ll have to pay tax on any profits made. The tax rate will depend on whether or not the recipient is a family member and how long it took for them to sell their property (if they did at all).
To accomplish this, add your child as an owner to the deed of the home. You can then use a quit claim deed or warranty deed to transfer ownership from yourself alone into joint tenancy with your child. Alternatively, you could sign over all rights in your will and have them inherited upon death.
You can sell as much as $14,000 worth of property to each person without incurring a gift tax. If you want to sell for less than fair market value, then make sure that the transaction is properly documented and includes an agreement in writing stating this intention.
Gifting usually involves no monetary exchange while transferring ownership usually does. When you gift someone something, there are no taxes and no paperwork to sign but when transferring ownership of property or money, both parties must be legally bound through a deed or contract (and sometimes taxes need to be paid).
Conclusion
Gifting property to children can have tax consequences, but there are different ways of gifting property that can help you minimize those consequences. It’s important to understand the legal process of gifting in order to make an informed decision.
Author Bio
Jibran Qureshi FCCA is the Managing Director of Clear House Accountants, and has over 10 years of experience in practice and across multiple industries. Jibran’s educational background includes a Master’s in Financial Strategy from Oxford University and an Executive MBA from Hult International Business School. His experience in Financial Strategy, Tax Planning, Operational Consultancy and Performance Reporting guide his cognizant approach to leading Clear House and its clients to the future. It was this dexterity that led him to be Enterprise Nation’s Top 50 Advisors.
Jibran is fueled by his passion for helping businesses. He unequivocally believes that as business advisors and accountants for our clients, it is our responsibility to work with them as business partners. As specialists, it is our duty to help our clients navigate through the complexities of constant change and the implications that come with it.
Over the past decade, innovative disruptions have changed the way businesses work, everything from cloud software, innovative business models, to AI and machine learning, have impacted how businesses operate, grow, and expand.
Jibran recognized the need to manage these disruptions sustainably, early on and shaped Clear House Accountants to not just be compliance specialists, but advisors who help build complex ecosystems around cloud accounting software, provide advice on funding support, help manage innovative tax schemes, set up and implement complex strategic plans, and much more. So, his clients can thrive, not just survive.
Jibran developed his prime role as the Managing Director to build Clear House’s capabilities so it can add value for their clients. He is of firm belief that this can be done through consistent high-level training, building the right tools, and creating roadmaps to help businesses cope with prospective disruptions. He envisages that every client that comes on board, is provided maximum value through onboarding, ongoing services and the right mix of tools to help them become the best in the world.
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