Can I gift property to my children as part of my Inheritance Tax planning strategy?

Q. Can I gift property to my children as part of my IHT planning strategy?
A. Inheritance tax planning is a hot topic right now and particularly important for investors who own property as values have increased dramatically over the last couple of decades.
Gifting property to children is a useful way to reduce your exposure to Inheritance Tax but there are important issues to consider before you decide whether this is the right option for you. For the purposes of this blog, we will assume that the property to be transferred is a buy-to-let property and not the individual’s main residence as different rules apply.

How do I gift a property to my children?
The process itself is simple as all you need to do is instruct a solicitor to deal with the transfer.

What costs are involved?
There is no Stamp Duty Land Tax (SDLT) to pay when you transfer a property to children unless you are also transferring a loan with the property. If this is the case, SDLT is payable on the value of the loan.

There will be legal and administrative costs involved in transferring the title.

Capital Gains Tax
Capital Gains Tax (CGT) is payable when transferring a property which is not a ‘principal primary residence’. So if, for example, you are gifting a rental property to a child, you may be liable to pay CGT on any increase in value between the original purchase price of the property and its value when it is transferred to the child. CGT is not payable if you are gifting your own home which is your principal residence.

Every individual has a personal CGT allowance – which in the 2018/19 tax year is £11,700. Only gains above this are taxable.

Inheritance Tax
You can make an outright gift of the property to the child in order to reduce the value of your estate. This would be treated as a ‘potentially exempt transfer’ for Inheritance Tax (IHT) purposes. If you die within seven years of gifting the property, it remains within your estate for IHT purposes. Currently, IHT is charged at 40% on any part of an estate worth more than £325,000.
If this happens and there is Inheritance Tax payable, it is charged at 40% on gifts given in the three years before you die. Gifts made three to seven years before you die are taxed on a sliding scale known as ‘taper relief’. Go to https://www.gov.uk/inheritance-tax/gifts for more information.
Seven years after making the gift, there is no Inheritance Tax to pay.
Be aware though that, if you give away the property as an outright gift, you also give up any right to receive a rental income or share in any profits.

Income Tax
If you are gifting a property to a child under the age of 18, you will still be taxed on any rental income, even if the child is receiving the income. This isn’t the case if the child is over 18.

Are there any differences between the rules for UK individuals and overseas investors?
The main difference for overseas residents is that any CGT is limited to the gains made since April 2015 when CGT for non-residents was introduced. We would recommend overseas residents seek specialist advice.

Other important issues to consider
Don’t forget that if you gift a property to your children, it then becomes their asset and you are no longer the legal owner. It is then purely down to them what they do with the property.
Also consider what might happen if they get divorced. Their ex-husband or ex-wife would be able to make a claim against their estate and this would include the property/ies.

I hope this guide gives you a clearer view of the implications of transferring a property to a child. There are a lot of advantages in doing so, particularly in terms of Inheritance Tax planning. But there are also disadvantages and you should consider all these before making a final decision. Please note that Benham & Reeves Lettings do not act as tax consultants and that anyone concerned about what is best for their particular circumstances should seek professional financial advice.