Gifting your home to your children is a generous act, but it comes with significant financial implications.
This guide explores the consequences of such a gift and the crucial steps to ensure it is valid for Inheritance Tax (IHT) purposes.
(Read Time: Approx. 2 minutes)
Topics Discussed:
- The impact of Capital Gains Tax (CGT) on gifting property.
- Ensuring gifts meet IHT requirements and understanding Gift With Reservation (GWR) rules.
Capital Gains Tax (CGT) Implications
When gifting a property, the transaction is considered a disposal for CGT purposes, regardless of its success for IHT.
This means the donor faces CGT based on the property’s market value at the time of the gift.
The gift may qualify for Private Residence Relief (PRR) if certain conditions are met, potentially reducing the CGT liability.
However, any portion of the property value not covered by PRR will be subject to CGT at rates of 18% and/or 28%, increasing to 24% from April 2024, depending on the donor’s income levels.
Additionally, the tax liability must be reported to HMRC within 60 days of the gift’s completion.
It is crucial to understand that the children, as recipients, acquire the property at its market value at the time of the gift.
This means any future increases in property value will be subject to CGT unless the children reside in the property as their main residence, where further reliefs may apply.
Inheritance Tax (IHT) Considerations
For the gift to be effective for IHT purposes, it will only fall out of the donor’s estate after seven years.
Taper relief is available after three years but only on the amount exceeding the nil-rate band, currently set at £325,000 and frozen until 2027-28.
If the donor continues to live in the property without paying full market rent, the Gift With Reservation (GWR) rules come into play, meaning the property remains part of the donor’s IHT estate.
Gift With Reservation (GWR) Rules
If the donor continues to live in the property post-gift without paying full market rent, the gift is likely to be caught by GWR rules.
This means the property will remain part of the donor’s IHT estate unless full consideration is paid for the continued occupation.
Full consideration involves paying rent equivalent to market rates, and the lease terms may affect rental value.
It’s important to obtain independent market rent valuations and keep them up to date to avoid complications.
Additional Tax and Legal Considerations
Beyond CGT and IHT, other tax and legal considerations need attention.
Rental income received by the children from the property is taxable, adding another layer of financial responsibility.
The parents lose legal ownership of the property, posing risks if the children face issues like divorce or bankruptcy.
Furthermore, councils might view the gift as deliberate deprivation of capital, impacting eligibility for care or nursing home fees.
Another significant consideration is Stamp Duty Land Tax (SDLT).
While SDLT is generally not due on a gift, it becomes applicable if there is an outstanding mortgage on the property.
In such cases, SDLT is due, and higher rates apply for additional dwellings.
Additionally, minor children cannot legally own property, necessitating the use of trusts.
Summary
Without proper planning, you risk unexpected tax liabilities and complications that could impact your family’s financial security.
Saara is here to guide you in making informed decisions to protect your family’s future.
Whether you’re considering gifting your home or exploring other estate planning strategies, we can help you optimise your plans to minimise tax burdens and ensure a smooth transfer of assets.
Don’t leave your family’s financial future to chance. Call Saara at 01772 282768, chat with us 24/7 on WhatsApp at +447816848188, or fill out our contact form on our website to schedule your consultation today.
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