What are the reasons for gifting property to children?
People transfer ownership of their homes to their children and other descendants for a number of reasons.
In particular, donating property gives offspring a financial advantage in buying their first home and safeguards assets from being used to fund long-term care costs. It can also help with inheritance tax planning.
What is the legal procedure for transferring property?
The legal process is to obtain a professional valuation (expect to pay £500 to £600), then engage a solicitor to draft a deed of gift (legal fees ranging from £500 to £1,500), and then update the title deeds at the Land Registry.
The Land Registry transfer typically takes 4-6 weeks to complete, with a fee of £40 for online applications or £80 for postal submissions.
What are the tax considerations when gifting property?
Inheritance tax, capital gains tax, and stamp duty land tax are the taxes to consider when transferring real estate.
Tax rules around property gifts can be complex and subject to change.
How does inheritance tax apply to donated property?
The seven-year rule governs inheritance tax on transferred property.
Gifts made more than seven years before death are exempt and known as tax-free transfers. Tax is calculated on a sliding scale for a gift made within seven years of death - known as potentially exempt transfer or 'PET'.
The current inheritance tax threshold known as the Nil Rate Band ('NRB') is £325,000 and has been fixed until 2030. There is an additional threshold of up to £175,000 called the Residence Nil Rate Band ('RNRB') but it is only available against transfers at death, and not those during your lifetime.
As an example, if you give a £500,000 home as a gift and die within three years, the charge to your estate could be £70,000 in respect of inheritance tax. The first £325,000 would be deducted from your NRB. IHT at 40% would be due on the remaining £175,000, which means you would pay inheritance tax of £70,000.
The inheritance tax liability affects the estate, not the recipient of the gift (for example, it doesn't matter how much income tax the recipient pays) and can significantly reduce the value of the estate passed on to beneficiaries. Find out more about assessing whether IHT might be due.
What are the capital gains tax implications?
Capital gains tax ('CGT') on gifted property depends on the increase in value since acquisition.
You may need to pay CGT on the increase in value when gifting property to children.
There is an exemption. Principal Private Residence Relief ('PPR') exempts your main home from capital gains tax if certain conditions are met and only for gains while your property was your main residence. It doesn't apply to rental property or commercial property.
Current rates (2023/24) of capital gains tax on residential real estate are 18% for basic rate taxpayers and 28% for higher rate taxpayers, with your income tax band (that of the person giving the property) determining which rate applies. Those in lower tax rate bands potentially benefit from the lower rate.
Different rates apply to commercial property: 10% for basic rate taxpayers and 20% for higher rate taxpayers. The rules for gifting business property can differ from those for residential property.
Your annual exempt amount (£6,000 for 2023/24) can also reduce the capital gains tax liability.
So, gifting rental property can, but doesn't always trigger immediate capital gains tax liabilities. If you're gifting a rental property, you'll need to consider the potential capital gains tax implications.
Find out more about CGT on property.
When is stamp duty land tax payable on donated property?
Stamp Duty Land Tax ('SDLT') is not due on outright gifts of real estate.
However, stamp duty might be due if there's an outstanding mortgage or if the gift has conditions. If the recipient accepts a mortgage, stamp duty may be due on the mortgage amount.
For example, if you donate a property worth £300,000 with an outstanding mortgage of £150,000, the recipient might have to pay stamp duty on the £150,000.
What are the risks of transferring property to children?
The primary risks of gifting property to children are loss of authority, monetary insecurity, and potential relationship changes.
Once donated, the property belongs to your child - they can sell or mortgage it without your consent. 15% of parents who give property later regret the decision due to loss of control.
30% of over-55s express concern about having sufficient funds for retirement. Family dynamics can change, with disputes over gifted real estate contributing to 14% of family estrangements.
Economic insecurity is a major concern when giving substantial assets. You relinquish a valuable resource that could have funded your retirement or unexpected expenses. This decision can substantially affect your net income in retirement, potentially reducing the amount you have available for living expenses. If you later require long-term care, you might struggle to afford it.
The donated property's value is still considered in means tests for care home fees for seven years after the gift. As a result, if you suddenly face care costs, transferring ownership into your children's names isn't going to mean that you won't pay them.
Loss of influence extends beyond financial aspects. Your offspring might make decisions about the property that you disagree with, such as renovations or letting it out. This loss of authority can lead to stress and tension in your connection.
Relationship shifts can occur due to perceived unfairness among siblings or changing family dynamics. If you gift property to one child but not others, it could cause resentment. Furthermore, your bond with the child who received the gift might alter, as they might feel obligated or entitled to make decisions on your behalf.
How does transferring property affect care home fee planning?
Local authorities investigate property transfers when assessing care home fee eligibility, looking for deliberate deprivation of assets. They examine factors like timing, reason, and amount donated, with gifts made within six months of needing care scrutinised.
If the local authority determines a gift is deliberate deprivation, they may consider the property as still yours for fee assessment.
For example, if you give your house to your children and then need care within six months, the local authority could include the house's value in your financial assessment.
What are alternatives to outright property donation?
Trusts, equity release, and selling at market value provide options for outright real estate gifting.
The UK has over 170,000 trust funds in existence (technically called settlements), with property often a significant asset.
The UK equity release market reached £3.94 billion in 2022.
Trust funds allow you to determine terms for property use and inheritance.
Equity release enables you to access your home's value without moving. Selling at market value prevents some gift-related tax issues but may incur stamp duty for the buyer.
Can you gift property with a mortgage?
You can give property with a mortgage over it, but it requires lender approval. The lender checks the recipient's financial capacity to take on the loan - a process typically taking 2-4 weeks.
With 30% of UK homeowners having a mortgage and an average outstanding balance of £130,000, this scenario is relatively common.
As mentioned above, stamp duty implications arise if the recipient takes on the mortgage. They might have to pay stamp duty on the mortgage amount. Given the complexity of these transactions, it's advisable to seek professional tax advice before proceeding.
How does transferring property affect your financial security?
Gifting property to your children will influence your retirement plans and future housing needs. Consider whether you'll have enough to cover living expenses and potential care costs.
The average UK pension savings at retirement is £61,897, and 67% of UK over-65s own their homes outright.
For instance, if you donate your home to your children, you might struggle to afford a £2,000 monthly care home fees in later years, whereas if you rented it out, you might be able to meet those fees.
How can gifted property be protected in a divorce of the recipient?
Gifted property is at risk in divorce proceedings. Generally, the law is that a spouse or civil partner is entitled to half the joint estate. If you receive your parent's home as a gift, you might find that your ex is given half of it if you divorce or annul your civil partnership.
Pre-nuptial agreements can help safeguard gifted property, though they're not legally binding in the UK.
Trust structures, such as discretionary trusts, can isolate gifted property. However, they can be expensive to maintain.
What are the record-keeping requirements for gifted property?
Keep comprehensive records when transferring real estate. HM Revenue and Customs can investigate gifts given up to 20 years ago.
Retain the deed of gift, property valuation, correspondence with solicitors and Land Registry, and tax returns. Preserve records for at least seven years after the gift, or indefinitely if possible. Electronic storage options such as cloud services offer secure, long-term record-keeping solutions.
Who is responsible for ongoing property costs after donating?
The new owner - your child - becomes responsible for property outgoings, including maintenance, insurance, and taxes. UK homeowners pay an average of £5,000 annually on property maintenance.
Your child must also manage property-related responsibilities such as buildings insurance, council tax payments, and compliance with leasehold terms, if applicable.
Before gifting, discuss property costs and consider creating a written agreement about financial obligations to avoid future disputes.
Frequently asked questions
Can I gift only part of my property?
You can give a share of your property, but it requires mortgage lender approval if you've a mortgage.
Partial gifts have similar tax implications to full property donations, proportional to the share transferred.
What happens if I need care shortly after gifting my property?
Local authorities examine recent gifts when assessing care fee eligibility. They might see it as deliberate deprivation of assets, potentially considering you as still owning the property for financial assessments. This could change your eligibility for care funding.
Can I keep living in the property after gifting it?
You can, but it's considered a gift with reservation of benefit for inheritance tax purposes. The property stays part of your estate unless you pay market rent (not a favourable rent) to the new owners.
If you do pay rent, your children will need to pay income tax on this rental income, which will be subject to the standard income tax rules. Also bear in mind that when parents gift assets to children under 18, the income tax band is that of the parent, not the child.
Living in the property rent-free after donating it can cause tax complications. Allowing your children to live in it rent free might also have tax implications for them.
What if my child wants to sell the gifted property?
Once the legal title has been updated, your child has full ownership rights, including the right to sell. To prevent immediate sale, think about using trusts. These let you put conditions on the gift.
How does gifting property affect my state pension or benefits?
Gifting property impacts means-tested benefits.
Your local authority might see property gifts as deliberate deprivation of capital when assessing benefit eligibility.
The Department for Work and Pensions uses similar rules to those for care fee assessments. They could consider you as still owning the property's value, potentially changing your entitlement to benefits like Pension Credit or Council Tax Support.