Gifting property using a deed of gift isn’t always simple but there can be benefits of using this method to transfer property.
By using a deed of gift to transfer or gift property ownership to a family member there are some tax advantages, Your property can often be the number one reason for an IHT bill on your death, so the main advantage and reason for gifting using a deed of gift are savings in inheritance tax.
In this blog, I’ll cover the reasons to use a deed of gift, how it works, tax implications around IHT, Capital Gains Tax and Stamp Duty Land Tax and any benefits and risks associated with it.
Why is gifting property popular?
One of the main reasons that people consider transferring property using a deed of gift is Inheritance Tax (IHT) or potentially to avoid a property being sold to fund future care home costs. Property can be the largest asset in a person’s estate and can potentially mean your family members facing an IHT tax bill or a local authority using the future value of your property to fund your future care.
How does a deed of gift work?
A Deed of Gift is a formal legal document that allows you to give a gift of property or money to another individual. It can be used to transfer property (or a partial share in a property) or money to another person without payment in return.
Is gifting my house to a family member the right choice for me?
A transfer by way of gift requires expert advice and professional fees will be involved, so it needs be given careful thought as to the advantages and costs before committing to the process.
The first thing to consider is if your estate will actually be subject to IHT.
Inheritance tax (IHT) is charged on an individual’s estate at 40% of the estate value exceeding £325,000 (or £500,000 where a main residential property is passed on death to a lineal descendant and the total value of the estate is less than £2 million).
House price increases have put many over this threshold, so it is worth taking advice before you decide to gift property.
Gifting property to family members with deed of gift
With the right advice, it can be possible to transfer ownership of your property through a deed of gift or transfer of gift, both definitions mean the same thing.
Some simple things to consider before undertaking a deed of gift are:
- Does the value of my property mean my beneficiaries will face an IHT bill and will gifting my property avoid or lessen the IHT bill?
- Is the current owner of the property of sound mind and acting of their own free will?
- Is the property clear of all outstanding debts secured against it?
- Is the owner listed in the Land Registry’s proprietorship register?
For transferring property in this way, there is a complex legal process to go through with forms to be completed and sent to places like Land Registry as well as reporting to HMRC. Seek independent legal advice and tax advice before embarking on the process.
What are the tax implications for property gifts?
Capital Gains Tax (CGT)
A gift of property is subject to CGT, which is charged on any profit arising, or treated as arising, on the gift.
If a gift is made to a close family member, the market value of the asset is used to calculate any CGT due, and CGT is charged on the gain deemed to have arisen. The gain is calculated using increase in value between the date of acquisition and the date of disposal, less the purchase price, any capital improvement costs and associated costs the property purchase or gifting, for example, legal fees, professional fees (such as estate agents) and SDLT.
Under the CGT annual exemption (if it has not already been used), the first £12,300 of gain is tax-free. The balance is then charged at 18% or 28%, depending on the donor’s income for that tax year.
If you purchase a property and is immediately gifted, there should be no gain to tax (assuming there is no increase in value between the dates of purchase and gift).
If the property gifted was or is, the donor’s main home, then Principal Private Residence relief (PPR) may exempt some or all of the gains from CGT.
If the property is the main residence of the recipient, they may also qualify for PPR when they sell the property. Seek expert tax advice on these areas.
Even if there is tax to pay, the gift of the property must be reported HMRC within 30 days, and any tax due will also be payable by that deadline.
Inheritance tax (IHT)
Inheritance tax (IHT) is generally charged on an individual’s estate at 40% of the estate value exceeding £325,000 (or £500,000 where a main residential property is passed on death to a lineal descendant and the total value of the estate is less than £2 million).
Gifting property does not mean that you avoid inheritance tax immediately. The gift will only be exempt from IHT if the donor survives seven years from the date of the gift.
Property gifts are considered a ‘potentially exempt transfer’ and the full 40% of IHT will need to be paid should the donor pass away within the first three years of the transfer.
If the donor survives at least three years, but less than seven years, a tapered IHT rate applies.
Gift with reservation of benefit
If you retain an interest in the property it will be treated as a ’gift with a reservation of benefit’ and the property will remain in the estate and taxed fully on death.
In other words, you must divest yourself of any interest in the property before HMRC recognises the gift. For a gift not to be treated as a gift with a reservation of benefit, you must leave the property when it is gifted and never move back in. This can, lessen the appeal of such a gift.
However, if pay rent at the market value to stay in property, you may avoid the gift being considered a gift with a reservation of benefit. Bear in mind however, that the recipient(s) may have to pay income tax on the rent received.
Gifts made to trusts
It is worth noting that gifts made to trusts will be subject to an immediate IHT charge of 20% where the value of the gift exceeds the available nil rate band of £325,000. However, the nil rate band is refreshed every seven years, meaning that significant gifts can be made free from IHT if staged throughout a person’s lifetime.
Stamp duty land tax (SDLT)
Stamp duty should not be an issue with a deed of gift, as it is only payable if there is a mortgage attached and there shouldn’t be any debt secured against the property when completing a transfer of gift.
SDLT is charged on the consideration paid for the transfer, or where the land or property is subject to debt, and the value of the debt is transferred with the gift.
Consider that if you purchase a property to gift to children, there could potentially be SDLT charges twice, firstly when you purchase the property and again on the later gift to your child if there is debt secured on the property transferred.
Stamp duty bands for 2022 are:
- 0% on the first £125,000 (£0).
- 2% on the next £125,000 (£2,500).
- 5% on the next £350,000 (£17,500).
There are different rates in Scotland and Wales.
Can you cancel a deed of gift?
Once a deed of gift has been executed, you will have no legal right to cancel or revoke the deed, unless there is a clause within the deed itself allowing you to do this. Therefore, you should seek advice before taking this step.
Risks of gifting property
There can of course be some risks involved with gifting your property, even to close family members. For example:
- Remember that once the deed has been executed, you will no longer be the legal owner of your home and, as mentioned above, you’ll have no way of reversing the decision unless you have added a specific clause to your deed prior to completion.
- Beneficiaries may also have future problems, for example if you beneficiaries face a divorce in the future. The spouse of your beneficiary will potentially claim a portion of your property.
- If you beneficiaries face financial problems in the future (and you are living in the property still and paying rent), you may face the loss of your home and should you beneficiary be declared bankrupt, your property will be at risk.
- If you intend living in the property, you need to understand the loss of control over your home, should family issues or disputes arise in the future.
- With regard to care home fees, if the donor gifts assets or income, including property, to avoid these being included in the financial assessment for care home fees, the local authority may still include the value of these assets regardless of the fact they are no longer owned. Seek advice before proceeding.
Alternatives to property gifting with a deed of gift
There are a number of alternatives to a deed of gift that could be explored if this method isn’t the most suitable option for you or your beneficiaries. For example:
- Straightforward sale and purchase arrangements.
- Concessionary purchase.
- Transfer equity.
Transferring property ownership to a family member using a deed of gift is not a simple process and should be carefully considered. Seek advice from a tax specialist and specialist legal advice before pursuing this option. There are many tax implications to consider.
If you need specialist tax advice and help with gifting property or other assets, then call us today on 03300 886 686, or you can also e-mail us at email@example.com.
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