Gifting a property to your children can feel like a generous and straightforward decision, but it comes with important legal and financial considerations. From potential tax liabilities to future inheritance considerations, it’s unfortunately not as simple as handing over the keys!
In this article, we’ll explore the key issues you need to understand. For example, the tax implications of gifting a home, the pros and cons of transferring property to your children, and whether selling your house for £1 is really possible- or advisable.
Key Takeaways
1. Be aware of any tax implications when giving gifts, as while you may avoid inheritance tax, other taxes may still apply
2. Weigh up the pros and cons of gifting a house to your child
3. Speak to a solicitor and financial advisor before making any decisions
Can I give my house to my children?
Yes, you can gift your property to your children, and there are both benefits and potential drawbacks to this. One of the main reasons people consider gifting property is the opportunity to reduce the tax they or their children pay. But is this really the case in practice?
Does gifting a house to my children mean they avoid paying tax?
Gifting a house to your children avoids them paying inheritance tax (IHT), as long as you make the gift at least seven years before you die. This is known as The Seven-Year Rule.
What Is The Seven-Year Rule?
In the UK, inheritance tax starts at 40% and applies to the value of your estate over £325,000. However, if you gift any of your estate within seven years of your death, IHT may still be payable on this gift after your death. The rate of tax paid on your estate tapers on a sliding scale, depending on how soon after the gift is given you pass away.
For example: Susan dies 3 years after gifting a house to her child. Because the house has a value of over £325,000, her child is charged inheritance tax. The amount will be 32% as it falls into the ‘3-4 years between the gift and death’ rate.
However, John dies 10 years after gifting his house to his children. As he passed away more than 7 years after making the gift, no inheritance tax is payable on the property’s value and it is not treated as part of his estate.
Gift with Reservation of Benefit (The IHT Trap)
If you continue to live in the house after gifting it, HMRC may treat this as a ‘gift with reservation of benefit‘, meaning the house stays in your estate for IHT, even if you technically do not own it anymore. It’s important to be aware of this, often known as an Inheritance Tax Trap. To avoid this trap, you can pay market rent to your child. However, it’s important to get advice based on your specific situation.
Other Tax Implications
Capital Gains Tax (CGT)
This is a tax calculated on the increase in a property’s value from the time you acquired it to the time you gift it. If you’re gifting them your main residence, it likely won’t apply thanks to Private Residence Relief. However, it may apply if you’re gifting a second home or investment property. The best way to avoid this is to buy a property and immediately gift it to your child, so its value doesn’t have time to increase.
Income Tax (IT)
Your child will not have to pay income tax if you gift them a property. However, income tax may be applicable for them if you are paying them rent to continue to live in the property. This is treated as rental income, which is taxable.
Stamp Duty Land Tax (SDLT)
Stamp duty generally does not apply to gifting property to children, unless there is a mortgage involved. If there is a mortgage, and your child takes responsibility for it, they may be charged SDLT for the mortgage balance if the balance is above the SDLT threshold. This is known as a consideration. If your child is a first-time buyer, they may qualify for first-time buyer relief.
To put it simply:
- A gift with no consideration (mortgage) = no Stamp Duty Tax.
- A gift with consideration (mortgage) = Stamp Duty tax is charged.
See our latest guidance on Stamp Duty updates here.
Tax Summary
- Your child won’t pay Inheritance Tax, unless you pass away within seven years of gifting the property.
- Your child may have to pay Capital Gains Tax if the property increases in value in between you buying it and gifting it to them. This likely wont apply to gifting of your main residence.
- Income Tax is only applicable for your child if you are paying them market rent to continue to live in the property. It only applies to the rental income
- Stamp Duty Land Tax is dependent on whether you are passing on a mortgage or not
Pros and Cons of gifting a house to your child
Pros
- Your child may avoid paying Inheritance Tax (should you live for at least seven years after gifting)
- You are providing support and financial stability for your child
- You can avoid probate issues upon your death
- It reduces your estate value, so less tax may need to be paid upon your death
Cons
- Loss of control over the property: your child could sell the house or even evict you if you still live there (unless official agreements are made)
- Gift with Reservation Benefit (IHT trap): HMRC may still treat the property as yours if you continue to live in it. You will need to pay market rent to your child to avoid this
- Risks of the house being sold or lost if your child faces divorce or bankruptcy
- Tax implications if the seven-year rule is not met
Can a child under 18 own a property?
No, a child under the age of 18 cannot legally own a property. Instead, the property can be held in a trust with a trustee, typically a family member, such as their parents. This is known as a bare trust: the trustee has no power over the assets. Once the child turns 18, they will have full control and legal ownership over the home.
Can I sell my house to my child for £1?
In short, yes, it is possible to sell your home to your child for £1. While selling your house at a reduced rate may seem like an alternative to gifting the property, a ‘gift’ also includes any money you lose when you sell something for less than its worth. This means the seven-year rule still applies, along with the other taxes we’ve outlined and any conveyancing fees.
Can I gift my child my property and continue to live in it?
Remember the Inheritance Tax Trap? While you can continue to live in the property, HMRC treat this as a Gift with Reservation of Benefit. To avoid this, you will have to pay market rent to your child!
Can I gift my child my holiday home or investment property?
You can gift holiday homes, second homes, and investment properties to your child. However, as these are not your main residence, Capital Gains Tax applies. This tax is calculated from the gain in the value of the property since you bought it.
Is it legal to give my child my property?
Yes, it is absolutely legal to gift your property. Parents can sell or gift their children their property for the market value, a reduced value, or for no cost at all. The process involves transferring ownership and ensuring taxes are accounted for. Please get in touch with a conveyancer if you’re considering selling or gifting your property to your child.
What’s the legal process of gifting my child my property?
The legal process of gifting a property involves a ‘Deed of Gift’– a legal document which confirms the voluntary gifting, with no consideration (financial gain for the gifter). This is legally binding and must be written and signed in front of a witness. Deeds of gifts are important as they reduce the risk of any future disputes or potential tax liabilities, making your intentions clear.
Is it better to gift a property or let my child inherit it?
You’ve now read all about the pros and cons of gifting your child a property. So, is it better to gift your home, or to let your child inherit it? This decision depends on your personal circumstances.
If your estate is still under the inheritance tax threshold of £325,000, it may be better to keep your property.
However, if your estate is valued above the IHT threshold, your child (or other chosen beneficiaries) will pay the standard Inheritance Tax rate of 40% on the part valued above £325,000 when they inherit it. In this case, gifting may be a viable alternative, as long as you survive the seven years after gifting.
Why do I need a solicitor?
While you may think that if you aren’t selling a property, you don’t need a conveyancer, transferring titles is still a complex legal and tax-sensitive matter. An experienced conveyancer can register the change of ownership, along with completing any land registry forms. They will look at your specific situation to help you make an informed decision based on what is right for you. It is also recommended to get advice from a financial advisor before you make any decisions.
Not using a conveyancer could lead to various problems, including:
- Incorrect title transfer
- Missed tax payments and subsequent penalties
- Disputes with children
- Problems with care home fees
- HMRC may treat the gift as invalid, which will have significant tax implications
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