With the rising cost of living in the UK, many people are considering gifting or selling their property to reduce or avoid Inheritance Tax. Gifting or selling property is not without risk, and there are potential pitfalls to consider.
We address some of the most frequently asked questions about gifting or selling property, helping you to understand the potential benefits, the common pitfalls, and the key issues to consider before taking any action.
Key Takeaways
- Gifting or selling property does not automatically avoid Inheritance Tax, and strict rules, including the seven-year rule, apply.
- Continuing to live in a gifted property without paying full market rent can mean it is still counted as part of your estate.
- Undervaluing a sale or gifting property can trigger additional tax implications, including Capital Gains Tax and potential Inheritance Tax liability.
- Gifting property carries legal and financial risks, including loss of control, potential disputes, and possible impact on care fee assessments.
Can I gift my property to my family members?
We are frequently asked to arrange a property transfer into the name of a child or another relative, but this is not effective from an Inheritance Tax perspective in most circumstances.
If there is no outstanding mortgage, you can gift your property to family or friends instead of selling it or leaving it in your Will. The most common way to gift your home is known as a Transfer for Nil Consideration, popularly known as a Deed of Gift.
Before making a gift of your home to someone, you must meet the following four conditions:
- You must be of sound mind and not acting under pressure or influence
- Be listed as the registered owner with HM Land Registry
- Have no outstanding mortgage on the property (if there is an outstanding mortgage, you can transfer the equity instead)
- Ensure there are no charges secured against your property.
What are the Inheritance Tax implications of gifting my property?
When you gift a property to someone, this means that no money has been exchanged during the transfer. You have essentially surrendered your interest in your home to the recipient and made no monetary gain or retained any benefit.
If you gift your home at least seven years before you pass away, this may reduce the overall value of your estate and the amount of Inheritance Tax on your estate, provided certain conditions are met. This is known as the seven-year rule and applies to gifts of property, money and possessions. Whilst some gifts are exempt from Inheritance Tax, most are subject to the Inheritance Tax rules.
Can I remain in the property after it has been gifted?
You can stay in the property once you have gifted it to someone; however, you must:
- Pay full market rent to the new owner
- Pay bills
If you remain in the property rent-free after the ownership has been transferred or retain any other benefit, the property will not be exempt from Inheritance Tax.
Are there any other tax implications to consider before gifting my property?
You or the person you gifted the property to may be subject to Income Tax and/or Capital Gains Tax, depending on the circumstances and intentions of the gifted property.
We therefore recommend that you and the recipient of the gift obtain professional advice based on your circumstances, the outcome you are seeking to achieve and your loved one’s intentions in mind before proceeding with gifts of property.
Are there any other risks I should be made aware of if I choose to gift my property?
Gifting property can sometimes lead to family disputes and misunderstandings regarding expectations and responsibilities associated with the property.
Due to the permanent nature of a property transfer, there are risks involved. Once you gift your property to someone, you have essentially given up your legal rights to the property.
If you intend to continue living in the property, you will place yourself in an unprotected position. The new property owner may choose to evict you if they need to sell the property.
If the new property owner is married and has any complications in their marriage, the property may need to be sold as part of a divorce settlement. If the new owner becomes bankrupt, then you could lose your home.
Does gifting my property to someone affect care home fees?
If you gift your property to someone, this may impact your eligibility for certain benefits, such as assistance with care fees. Local authorities may consider the gift of property as a deliberate deprivation of assets, which can ultimately affect your ability to receive financial assistance for care.
What if there are outstanding liabilities on the property I want to gift?
If you own a property with an outstanding mortgage and you wish to gift this property to someone, you will need to obtain your lender’s consent to transfer the property and the outstanding mortgage payments.
If your property has an equity release or registered charges, you will need to obtain specialist advice due to the legal implications involved.
Can I sell my property to someone for more or less than market value?
If you sell your property for more than you originally paid for it, you may be charged Capital Gains Tax.
If you sell your property for less than market value, the difference in price will automatically be treated as a lifetime gift. This gift may be subject to Inheritance Tax if:
- Your estate is worth more than the nil rate band (currently £325,000)
- You pass away within seven years of making the gift
We recommend obtaining formal advice on the potential tax implications based on your specific circumstances.
Can I sell my property to someone if there is an outstanding mortgage?
You can still sell your property to someone if there is an outstanding mortgage.
However, you would need to sell it for a minimum of the amount left to pay.
Again, if you are selling the property at an undervalued price, the difference in price will automatically be treated as a lifetime gift and may be subject to Inheritance Tax.
Can I sell my property for market value and gift the proceeds of the sale?
If you choose to sell your property, you can make a gift of some or all the proceeds of the sale.
If the value of the gift is the value of the nil rate band (currently set at £325,000) or less, there will be no Inheritance Tax to pay on the gift, provided you live for at least seven years from the date of the gift.
If you die within 7 years, then this gift will use up your nil rate band, and if you gift more than the value of the nil rate band and die within 7 years, then there would be inheritance tax to pay on your death.
How Howell Jones Solicitors Can Help
Howell Jones Surrey Solicitors has a wealth of experience in estate planning.
If you’re considering gifting or selling your home to someone, or if you have any queries about your specific arrangement, please contact our friendly Wills Solicitors in Surrey, and we would be delighted to assist.
