Believe it or not, you can indeed gift your home to your children and avoid Inheritance Tax (IHT), provided there is no mortgage on the property. However, this process comes with several important caveats. Here’s a detailed look at how you can gift your home while addressing potential tax implications and the necessary steps.

 

Why Consider Gifting Your Home?

Your home is likely filled with cherished memories and you might want to ensure it remains within the family. Gifting your property can be an effective strategy to reduce potential tax liabilities for your children, while also keeping the home in the family. However, this decision requires thorough planning to avoid legal or tax complications.

How to Gift Your Home

The most common method to gift your home is through a Transfer for Nil Consideration, also known as a Deed of Gift. This process involves transferring ownership without receiving any monetary compensation.

Key Conditions for a Successful Gift

To successfully gift your property, you must meet these conditions:

1. Sound Mind: Ensure you are making the decision voluntarily and without external pressure.
2. Registered Ownership: You must be listed as the owner with the HM Land Registry.
3. No Mortgage: The property must be free of any outstanding mortgage. If there is a mortgage, you might consider transferring equity instead.
4. No Secured Charges: Ensure there are no charges or liens against the property.

 

Tax Implications of Gifting Property

Gifting your home can significantly impact your Inheritance Tax liability:

• Inheritance Tax Reduction: By transferring the property at least seven years before your death, you can reduce the value of your estate and, consequently, the IHT your children will need to pay. This is known as the “seven-year rule” and is a crucial element of estate planning.
• Capital Gains Tax: If your children sell the property after inheriting it, any capital gains realised will be subject to Capital Gains Tax (CGT). This applies for any period of ownership when they do not use it as their primary residence.

Remaining in the Property After Gifting

Yes, you can continue to live in the property after gifting it to your children, but you must:

• Pay Market Rent: You need to pay rent at a rate comparable to local rental properties.
• Cover Bills: You must also pay for utilities and other bills associated with the property.

If you were to live in the property rent-free after the transfer, it would be caught by the gift with reservation rules (GWR), meaning it would not be free of IHT because you continue to enjoy effective “ownership” of the asset. It would be as though you never gifted it in the first place. It is an anti-avoidance tax rule.

Risks of Transferring Property

Transferring property is a permanent decision with inherent risks:

• Eviction: You could be asked to leave the property if your children decide to sell it or due to family disputes.
• Family Complications: If your child’s marriage encounters difficulties, the property could be included in a divorce settlement.

Given the potential risks and the irreversible nature of gifting your home, it’s crucial to think carefully and consider safeguards to protect both yourself and your children.

Conclusion

Gifting your home can be a strategic move to reduce Inheritance Tax and ensure the property remains in the family. However, it requires careful planning to navigate the tax implications, legal considerations, and personal risks. Consulting with a financial adviser and/or a legal expert can help you make an informed decision and set up appropriate measures to protect your interests. You know it makes sense.*

 

 

*RISK WARNING

The value of investments can fall as well as rise. You may not get back what you invest. The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction. All information is based on our current understanding of taxation, legislation, regulations and case law in the current tax year. Any levels and bases of relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. The Financial Conduct Authority does not regulate tax planning, estate planning, or trusts.  This blog is based on my own observations and opinions.