We are often asked to give advice to parents on gifting their property to their children, the main aim behind this decision is normally ‘to save inheritance tax’. Although this sounds a simple enough tax saving measure, unfortunately it is not straight-forward and in fact can result in disadvantageous tax consequences.
As you may be aware, it is possible to gift assets (including a property) during your lifetime and if you survive 7 years from the date of the gift, then the value of the gift should fall outside of your estate for inheritance tax purposes. However, in order for the gift to be fully effective for inheritance tax purposes, you must give the asset away without any strings attached. To successfully gift your property to save inheritance tax, you cannot retain a significant benefit or enjoyment in the property, such as receiving the rental income or living in the property rent-free. If you do, it will be considered a ‘gift with reservation of benefit’. In this case, no matter how many years ago you made the gift, the entire value of the gift at the date of your death will be considered part of your estate for inheritance tax purposes.
If the property you have gifted is your home it is possible to avoid it being considered a ‘gift with reservation of benefit’ by paying your children market rent for the property (the rate of which must be reviewed regularly). But this of course requires you to have sufficient cash assets and you should bear in mind that the rental income your children receive will be chargeable on their part to income tax.
There may also be other tax consequences of the transfer. Although there would be no capital gains tax payable upon gifting your property to your children (provided it is your principal private residence), there may be a capital gains tax liability for them upon selling the property if it is not their principal private residence. Depending on the circumstances, there may also be stamp duty land tax payable on the transfer and you should bear in mind that your children will be liable to higher rates of stamp duty land tax on the purchase of their own property if they already own your property.
Aside from the tax consequences, there are practical difficulties to consider. Once the property has been transferred to your children, it will be their property to deal with as they wish and it will form part of their own estate. You will therefore no longer have the property (or it’s proceeds) available for your own means and you should be aware that if your children become bankrupt, die or divorce, their share of the property would be considered part of their estate for these purposes and this could leave you in a very vulnerable position.
Ultimately there are multiple matters to consider before gifting your home to your children. It can be a useful tax saving measure, but before you make this decision it is important to seek legal advice on your individual circumstances.