Gifting Property: What Are The Inheritance Tax Implications?

Contrary to widespread belief, inheritance tax does not just impact the extremely wealthy. Rising property prices have meant more estates than ever are likely to face an inheritance tax bill.

Gifting property to children or family members can, in some cases, help reduce your potential inheritance tax liability. Below we explain the basics and answer some common questions.

WHO CAN I GIFT PROPERTY TO?

You can gift a property to a partner, a child or someone else.

Whether you incur an inheritance tax bill will depend on who you have gifted the property to and whether the property is your main home.

If you gift a house to a family member but continue to benefit from it in some way, it will remain as part of your estate when you die, and your family could face a tax bill at the maximum rate of 40% for anything over the nil-rate band.

WHO SHOULD I GIFT MY PROPERTY TO?

If you pass your estate to a spouse, civil partner or charity, no inheritance tax (IHT) is due, as this falls under the exemption rules.

If you leave it to your children or someone else, IHT is typically charged on an estate valued at over £325k, however, if your children, or grandchildren inherit the property when you die, you could get an extra £175,000 (this includes adopted, foster and stepchildren). This means your tax-free threshold could be £500,000, provided the value of your estate is under £2 million.

Another option is to give your children any income you generate from a house you rent out, as long as this does not affect your standard of living.

WHAT HAPPENS IF I AM GIFTED A PROPERTY?

As above, it depends on who gifted you the property. If your spouse or civil partner has gifted you property then you won’t have to pay inheritance tax, as this falls under the exemption rules.

However, if a parent gifted it, you might have to pay stamp duty if there is a mortgage on the property. (see next section below).

There is also a risk that if they died within seven years of transferring ownership of that property to you and their estate exceeds their inheritance tax threshold, there might be an extra bill to pay.

When it comes to capital gains tax, it’s the person selling or gifting the property who would be liable to pay this and not the receiver of the gift. This only applies if the property the person is gifting isn’t their main home. For example, if a parent has given you a buy-to-let property, they might have to pay capital gains tax on it, but you won’t have to worry about paying it.

DO YOU HAVE TO PAY STAMP DUTY ON GIFTED PROPERTY?

It depends on whether there is a mortgage on the house. If not mortgaged, your child won’t have to pay stamp duty. If there is a mortgage, they will have to pay stamp duty on the value of the outstanding loan.

If your child is earning a lot less than you and can’t afford the mortgage, a lender might not agree to you transferring the loan into their name. One option could be to act as a guarantor on the mortgage.

For more information on gifting property as part of managing your estate and mitigating IHT, please contact us here.

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Source: https://www.thetimes.co.uk/money-mentor/article/gifting-property-tax-implications/