Gifting property to someone else – especially if it is the home you live in – can be very complicated.
There are various tax implications to consider. Inheritance Tax (IHT) and Capital Gains Tax (CGT) are usually the main two direct taxes that you will need to think about, but you also might need to consider Income Tax and Stamp Duty Land Tax (SDLT). There are also other legal and practical considerations to bear in mind.
First things first, before giving anything away, have you determined if your Estate is likely to be liable to IHT at all?
How much are you worth?
Have you given away any cash or assets in the last seven years to others?
Do you know what IHT reliefs, exemptions and IHT nil rate bands are you entitled to?
As a starting point we can help determine if your Estate will be liable to IHT.
Thereafter, 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, once seven years has elapsed.
An effective IHT gift must be an outright transfer. Thus, if you benefit from what you have given away, anti-avoidance legislation may render the gift ineffective. 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 the arrangement must be reviewed regularly.
- If you give away a share in your home and live with the beneficiary, always pay your share of the property costs (at least).
There are a handful 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 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. Too often, professional advice is sought after the event when it is hard (or sometimes impossible) to reverse the situation. Aside from the tax implications of gifting property, consider your own security and protection from divorce of bankruptcy. Also, a local authority may consider ‘deprivation of assets’ in any financial assessment for care fees.
Our advice is to always seek help before you initiate a substantial gift. Are you aware of all the tax implications? Could your plan leave you worse off than doing nothing? Think about making things easier for your Executors when you pass away – is your Will up-to-date and have you determined if your Estate will be liable to IHT? Call CKLG on 01223 810100 for friendly help and advice.
