Gifting property to someone else, especially if it is the home you live in, can be very complicated and if you are considering that route as part of your inheritance tax planning, you need to consider a number of other issues and challenges.
There are a number of other tax implications to consider. Inheritance Tax (IHT) and Capital Gains Tax (CGT) are usually the main two main direct taxes that you will need to think about, but you may also need to consider Income Tax and Stamp Duty Land Tax (SDLT). There are also other legal and practical considerations to consider and tackle as well.
If it is inheritance tax that you are concerned about, have you actually determined if your Estate is likely to be liable to IHT at all:
- How much are you worth, have you made a list of the market values of your assets and savings
- Have you given away any cash or assets in the last seven years to others already
- Do you know what IHT reliefs, exemptions and IHT nil rate bands are you entitled to
- Have you already made a will and do you understand how the £1m IHT allowance for a couple works
- Have you already checked out our Blog on this.
After considering the potential value of your estate, and after giving due consideration to what you might need later in life, you could consider gifts to others whilst making use of IHT exemptions available during your lifetime. It should be noted that larger gifts in excess of these exemptions – such as property - will only be effective, for IHT purposes, after seven years from the date of the gift has lapsed.
A gift of my home. It is complicated
An effective IHT gift must be an outright legal transfer. If, however, you benefit from what you have given away, anti-avoidance legislation may render the gift ineffective. How to avoid this:
- If you give away your home but continue to live in it, you must always pay rent to the beneficiary at open market value. This income would be liable to Income Tax in the hands of the beneficiary and declared accordingly. The arrangement must be reviewed regularly to ensure a reasonable market rent is being paid.
- If you give away a share in your home and live with the beneficiary, you should at least always pay your share of the property costs.
There are a small number of exemptions if the benefit you derive from your gift is very small. However, there may be CGT implications if the property has not always been your home (if it has been a rental property for example) and, if mortgaged, an SDLT cost of gifting property to others may arise. This could result in a doubling up of tax charges (or more if the gift is not effective for IHT purposes).
If the asset you are benefiting from is not the original asset gifted, there could be a ‘Pre-Owned Asset Tax’ charge instead. An example of this could be the beneficiary purchasing a property for you to live in with cash previously gifted by you.
Tax is complicated but with proper advice before any gift is actioned, it can be managed.
You need to consider these points before taking any action. Do not seek professional advice after the event when it is difficult (or sometimes impossible) to reverse the situation. Apart from the tax implications of gifting property, you should consider your own security and protection from divorce of bankruptcy. It is also worth noting that a local authority may consider ‘deprivation of assets’ in any financial assessment for care fees as well.
Always seek help before you initiate a substantial gift. You may not be are you aware of all the tax implications. Your plan may actually leave you worse off than doing nothing, so you do need to think about making things easier for your Executors when you pass away. As noted in our blog on the £1m IHT allowance and the nil rate band for your home, your Will needs to include instructions to bequeath it to your children/grand-children, if you have not given it away and, therefore your Will needs to be up-to-date and again you will need to always reconsider if your Estate will be liable to IHT.
We have further information on IHT here and have further help and support in family tax planning here
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