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
- Explain how gifting a property works
- Identify the risks associated with gifting a property
- Understand how to gift a mortgaged property
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.
Inheritance tax
As mentioned above, a gift of property will only be exempt from IHT if the donor survives seven years from the date of the gift. If they survive more than three years from the date of the gift, and the gift exceeds the nil rate band (currently £325,000) then the IHT rate tapers down on the excess from 40 per cent on a sliding scale as follows:
| Years between the gift and date of death | Rate of IHT on the gift |
| Less than three years | 40% |
| Three to four years | 32% |
| Four to five years | 24% |
| Five to six years | 16% |
| Six to seven years | 8% |
| Seven years or more | 0% |
It is crucial to know that if the donor retains any interest or benefit in the property — for example, they continue to receive rental income, or live in the home rent-free or pay a rental figure significantly below market rent — then they would be considered to have made a “gift with a reservation of benefit”.
In order for the gift to be fully effective for IHT purposes, it must be given away without any strings attached. If the gift falls foul of these rules, it will remain part of the estate for the purposes of calculating IHT.
Paying the necessary market rent to an adult child to ensure the gift is made in accordance with these rules will have potential tax consequences for them, so this would need to be taken into account.
Capital gains tax
CGT is payable on the disposal of an asset, which includes when it is given away. It is payable on the difference between the base cost (the price the asset was purchased for) and the value at the date of disposal (the date the asset is sold or gifted).
Advice should always be sought to determine the rate of tax applicable — 18 per cent or 28 per cent depending on whether a basic or higher rate taxpayer; the availability of the “annual exempt amount” — currently at £12,300 per person but reducing to £6,000 from April 6 2023 and then down to £3,000 from 2024; the deadline for payment of the tax; and any other allowances or exemptions that may be possible to claim — for example, main residence exemption, costs of renovation, and professional costs associated with the transfer.
Stamp duty land tax
SDLT should not be payable if the property is a genuine gift and no “consideration” was given in exchange for the gift. However, it may be payable if there is a mortgage or some other debt attached to the property, or a price is paid.
