Inheritance Tax  

How gifting property to adult children works

  • Explain how gifting a property works
  • Identify the risks associated with gifting a property
  • Understand how to gift a mortgaged property
How gifting property to adult children works
Inheritance tax liability can be mitigated by making lifetime gifts, thereby reducing the value of an individual’s estate (Photo: Wutzkoh/Envato)

Gifting property to adult children can be a complex transaction for parents, but it can have a number of benefits.

In many cases, it is the best way for parents to pass on their wealth and make sure their heirs are adequately provided for.

It can also be a useful way of reducing the inheritance tax payable on their death or protecting a property from a future sale to fund care home costs. 

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These benefits do not happen automatically, however. It is therefore critical to ensure:

  • the gift is structured properly;
  • possible alternatives are examined;
  • ultimately, that the gift of a property is the right choice, both for the property owner and their child(ren).

Is it better to gift or inherit property?

For most people, their home is their biggest asset, which is why they may want to consider gifting a property during their lifetime, and an important point to consider in answering this question is what the IHT position might be on death.

When someone dies, if their net estate — for example, the collective value of their assets, after the deduction of any mortgage or other debts — exceeds £325,000 in value (the “nil-rate band”), IHT may be charged at 40 per cent on the balance save to the extent that it passes to an exempt beneficiary; for example. a surviving spouse or a charity.

There is an additional nil-rate band called the residence nil-rate band, which may be available when a residence, or the proceeds therefrom, pass on death to lineal descendants.

The RNRB is currently £175,000; however, if the net estate exceeds £2mn, the RNRB will be reduced by £1 for every £2 that the net estate exceeds that amount.

Married couples and civil partners can combine their unused allowances up to a total tax-free amount of £650,000 (or £1mn if they can also claim the RNRB) on the death of them both.

Leaving an estate to be inherited by children on death might have the consequence of a large IHT liability, which could ultimately force a property to be sold if sufficient cash is not available to pay the tax bill.

IHT liability can be mitigated by making lifetime gifts, thereby reducing the value of an individual’s estate and as such reducing the IHT liability on death. 

Lifetime gifts of up to £3,000 in a tax year are exempt from IHT. This amount is known as the annual exemption.

Assets valued over and above this annual exemption would be considered a potentially exempt transfer for IHT purposes. They are “potentially” exempt from IHT because the donor must survive seven years from the date of the gift for it to become fully exempt from IHT, as discussed below.

The timing of making a gift is therefore an important factor to take into account. 

What are the tax implications?

There are three taxes to consider when making a lifetime gift of property: IHT, capital gains tax and stamp duty land tax.