Gifting Property to Children and Conveyancing Issues you Need to Be Aware Of
Gifting property to children can be an excellent way to pass on property; it could prevent your estate from being liable for inheritance tax and you may still even be able to live in the property after you’ve gifted it. However, it is important to be aware of the full implications of gifting property, from tax liability to legal rights.
What Counts as Gifting Property?
Gifting property to children means that ownership of the property is wholly transferred from the original owner to the children, with nothing being given in exchange by the recipient. A deed of gift is often used to record the transaction.
You can sell your property to your children for less than its full market price if preferred. The process would be the same as a standard sale, though it will differ slightly if the buyer intends to take out a mortgage – they would need to take out a concessional mortgage to reflect on the reduced price. Bear in mind that if you sell a property for less than its full worth, the difference in value between the property’s market value and the reduced amount it was sold for will be considered a gift, which could affect your inheritance tax liability.
Alternatively, if you wish to hold joint ownership of the property with someone else, you could seek a transfer of equity instead. A transfer of equity allows you to add (or remove) ownership of a property from the legal title on the condition that at least one of the owners will remain the same. Those added to the property will also be added to the mortgage and can have the option of right of survivorship to the property should you pass away.
You may wish to discuss this with a transfer of equity solicitor
When a Gift may not be deemed as a Gift
It is important to note that a gift may not always been deemed as a gift. There are some circumstances where the gift can be bought into question in the future:
- If the Local Authority decide to try and recover unpaid care fees- Local Authorities have the power to ask for the money to be repaid by anyone who has made a gift of their assets. Note there is no time limit on this which means the Local Authority could go back over 50 years.
- If the property is being gifted for less than its market value and the giftor becomes bankrupt within five years, the official receiver or trustee in bankruptcy may be able to reverse the transaction. This could happen if the giftor intended to protect the property from creditors and the purpose of the transfer was to deprive the creditors of it
There are also some other considerations one should take into account before deciding whether to proceed with a gift:
- Any gifts of assets will affect the value of your estate which in turn could increase your liability to inheritance tax. Further, if you intend to rent out the property, or if the property is rented out already then you would be liable to pay income tax.
- If you do not already own another property then be aware that, by acquiring this property, you can no longer claim First Time Buyer’s relief should you wish to purchase a property in the future as you will already own a property. Further, if you intend to use the property as your main residence and then decide to purchase another property without selling this one, then you would be liable to pay a Stamp Duty surcharge on your new property which is currently 5% on top of normal Stamp Duty rates.
If you decide to purchase another property you may want to try our second home stamp duty calculator.
Can I Gift a Property With an Outstanding Mortgage?
You cannot simply transfer your mortgage to the new owner – you will need to settle your own mortgage first, then the recipient can take out a new mortgage on the property.
Note that the new owner will need to pay stamp duty based on the value on the property’s outstanding mortgage, if that is the sum that they will be paying to you on completion. If however you clear the mortgage prior to any transfer of property (and there is no other exchange of monies) then stamp duty may not be payable. You would need to take further advice from your solicitor depending on your circumstances.
Can I Gift a Property to Reduce Payable Inheritance Tax?
Gifting property can indeed reduce your inheritance tax liability as the property will usually not count as part of your estate after it has been gifted. However, if you die within seven years of gifting property, inheritance tax will likely be payable.
Plus, if you continue living in the property, the gift could be classed as a “gift of reservation” as you are benefitting from the transfer. If this happens, the property may be considered part of your estate and inheritance tax may be payable.
If you wish to continue living in the property after you’ve gifted it, you can avoid the gift being classed as a gift of reservation by:
- Paying rent to the new owners in line with local rates (you will not need to do this if you transfer part of your property via a transfer of equity and if the new owners live with you)
- Contributing to the payment of bills
Be aware that if the new owners are taking out a mortgage to purchase the property from you, the lender will need to be informed if you intend to still live in the property, especially if the new owners plan on altering the property to house you.
For more about gift of reservation, read our blog here: Gift With Reservation of Benefit
Can I Gift my Property to my Parents, Sibling or Spouse?
Technically, you can gift a property to anyone of your choosing, whether they’re related to you or not. However, in some circumstances, the recipient’s relationship to you may matter more.
For example, if you are selling your property to a loved one for less than its market value, the buyer may or may not be granted a concessionary mortgage (a mortgage for less than the property’s market value) depending on their relationship to the seller. Most lenders will grant a concessionary mortgage if the seller is the parent, grandparent or sibling of the buyer. Some lenders may grant concessionary mortgages to aunts, uncles, nephews or nieces of the seller.
The mortgage lender will need to be made aware if the property is being sold in this way for less than its market value. Otherwise, payable stamp duty may be calculated based on the full purchase price of the property, rather than the concessional price the buyer is really paying.
Gifting property to your spouse is usually more straightforward, and most gifts between married and civil partners are not subject to tax. However, you could instead choose to transfer equity to your spouse if you prefer, which allows you to become joint owners of the property.
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We are one of the few solicitors in London accredited by the Law Society as Wills, Probate and Inheritance specialists. Our team have extensive experience in handling a wide variety of wills and probate matters.
Do I Have to Pay Tax When Gifting Property?
Depending on the circumstances of the transfer, some taxes may be payable.
- Inheritance Tax: – If you die within 7 years of gifting property to someone else, the property will be considered part of your estate and inheritance tax may be payable on it. If you die within 3 and 6 years after the gift, however, inheritance tax will not be charged at the standard rate of 40%, but instead at a reduced rate depending on how many years later you died.
- Capital Gains Tax: – If the property you are gifting is not your main residence, for example a buy-to-let property or second home, capital gains tax could be payable based on its market value. However, CGT will not be payable if you are gifting property to your married or civil partner.
- Stamp Duty Land Tax: – Stamp Duty may need to be paid if any money changes hands between the recipient and donor, or if the property has an outstanding mortgage.
There are also some other possible tax implications that you should be aware of. These are less prominent but could still affect you. These are:
- Income Tax: – gifting rental property that produces an income to children can be a good way to utilise your child’s income tax annual allowance and their lower tax rate bands. However, where parents gift assets to children aged under 18 years old, any net income that goes beyond £100 per annum is taxed on the parents as if they still owned the asset.
- Rental Income Tax: – It is unlikely that this tax would apply on a gifted property unless you are also inheriting a tenant. In this case, you will owe Income Tax at a rate based in your overall income, including the rent
How Long Does it Take to Transfer Property as a Gift?
As long as there are no delays, the process can be completed in less than a month. The solicitor drafts the TR1 form and send it to the existing owner and new owner, then the transferee (if they are not instructing their own solicitor) can complete an ID1 form to verify their identity, after which the process can be completed and the transfer finalised.
Should the usual sale and purchase process need to be followed (if money will be changing hands or if there is an outstanding mortgage to consider), it will take longer to complete due to the mortgage application and usual searches.
How Much Does Gifting Property Cost?
Not including tax, the other costs payable will depend on whether the property is being gifted or sold, whether or not a mortgage needs to be factored in and, if the property is being sold, how much it is being sold for. The land registry fee to acknowledge the transfer will also differ depending on a few factors. You can find information about land registry fees on the government website.
You will also need to consider legal fees. Our solicitors generally work on a fixed-fee basis and provide a full breakdown of all fees prior to instruction, so you can instruct us with confidence. If you are selling the property, use our online quote generator for a free instant quote on our conveyancing fees.
Are there Any Risks Associated With Gifting Property to Children?
By gifting property to children, you lose all rights to that property – this may sound obvious, but this means you cannot legally force the recipient to give the property back and the new owners will be able to evict you if you are living there. No matter how close you are to your child, relationship breakdowns do happen and you should take this in consideration before gifting property to them.
Similarly, if you gift property to your child and their married or civil partner, be aware that the property may be sold or transferred into their partner’s sole name in the event of a divorce or dissolution.
Furthermore, if you are made bankrupt within five years of gifting property (including if you have sold property for a concessional price), the transfer may be voided and the property returned to you in order to settle your debt. For this reason, many mortgage lenders (and some conveyancing solicitors) will require you to take out insolvency indemnity insurance if a mortgage is required.
Gift with Reservation of Benefit
A popular way to try and cut down inheritance tax is by gifting property to loved ones before death; however, if you are not careful, your gift could be classed as a gift with reservation of benefit and you may still get caught out by inheritance tax.
If you continue benefitting from an asset in some way, despite giving it away as a gift, then this may be considered as a gift with reservation. This in turn could lead to you having to pay the full inheritance tax.
You may wish to read: Gift with Reservation of Benefit
How Starck Uberoi Solicitors Can Help
Our conveyancing and property team have received law society accreditation for our high-quality conveyancing services and share over 35 years of experience. We can provide expert legal advice and reliable services for even the most complicated of cases. With us, you can expect efficient and effective services, complete with easy communication and jargon-free advice.
In addition, we work under the same roof as our sister company Starck Uberoi Wealth to seamlessly combine legal, financial and mortgage services for our clients. They can offer bespoke, independent mortgage advice on mortgages across the whole of the market with your needs and circumstances at the heart of every recommendation. Plus, Starck Uberoi Wealth provide expert financial planning and tax advice, including inheritance tax planning. We offer a 10% discount on our conveyancing fees for clients who use the services of Starck Uberoi Wealth.
To book an appointment, please call 020 8840 6640 or email solicitor@starckuberoi.co.uk.
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