With house prices on the rise and no changes to the Inheritance Tax (IHT) allowances being proposed by the new Labour government as things stand, more people than ever are finding that their main residence is their biggest asset and is taking their overall estate above the current IHT thresholds.

One way to mitigate IHT is by making outright gifts of property during lifetime to individuals or into a trust structure for their benefit.

There are a number of different tax implications when making a gift of property during your lifetime and it is highly recommended that you speak with an expert before proceeding with this planning. This article sets out a summary of some of the key considerations when looking to gift a property either outright to a family member or to a trust for their benefit.

IHT

The IHT Thresholds

IHT is charged at 40% on an estate’s value that is above £325,000. This threshold can rise to £500,000 if there is a main residential property being passed on death to lineal descendants, such as children or grandchildren, and the total value of the estate is less than £2m.

Anything above these available allowances (subject to any other available reliefs or allowances) is then taxed at 40% tax. This therefore has a huge impact on the net value left to beneficiaries.

A Gift with Reservation of Benefit (GROB)

For those considering to gift property in lifetime, (whether outright to certain individuals or into a trust) must ensure that they will not need to use or benefit from the property in any way for the remainder of their lives. Anything to the contrary, (such as continuing to live in the property, or receiving the rental income) would be considered a “Gift with a Reservation of Benefit” and the property would remain part of their estate for the purposes of IHT.

The only way one can continue to live in the property, and benefit from it being outside of their estate for IHT, is to pay a “market rent” to whomever they have given the property to (which would be subject to income tax on the recipient of the gift), and any missed payments and/or outdated market rent, could instantly reverse the entire piece of planning.

The 7 year rule

Making gifts of property to an individual during your lifetime is considered a “potentially exempt transfer”, so that the gifted property will only be exempt from IHT if the individual survives a minimum of 7 years from the date of the gift, otherwise the whole property will remain part of their estate for IHT purposes.

Gifts into trust

When making gifts of property to a trust, as opposed to individuals, if the value of the property is above £325,000 (or £650,000 if joint owners), there will be an immediate charge to IHT at 20% on the excess.

There is also an IHT charge of up to 6% on every 10 year anniversary on anything above £325,000 (or £650,000 for joint owners).

Capital Gains Tax (CGT)

A gift of property is considered a disposal for CGT purposes. This means that there might be CGT to pay if the the property has increased in value in the time since it was acquired, and any gain is above the annual allowance, which is currently set at £3,000. Anything over this allowance could be taxed at 24%, albeit it is usually possible to holdover this gain (subject to certain limitations) if gifting the property in to a trust.

Where the property in question is your main residence, there may be Principle Private Residence relief (PPR), which may exempt some or all of the gains from being taxed to CGT.

When gifting a second home or a buy-to-let property, higher rates of CGT apply to any gain which is above your annual allowance. As the second property is not considered your primary residence, PPR relief will also not be available.

Where CGT is due, it is the person making the gift who is liable to pay the tax and this must reported to HMRC within 60 days from the date of the gift.

SDLT

SDLT is charged on the “consideration” given for the gift. This is usually relevant where there is an outstanding mortgage in place, secured against the relevant property, and the gift made comes with a mortgage. In this case, there would be an SDLT charge on the value of the outstanding mortgage.

In summary, whenever you are considering giving away property during your lifetime, you must be sure that you have no intention or need to benefit from this property for the rest of your lives, and you have taken specialist tax advice on any implications of the gift itself.

The Private Client team at JMW Solicitors have a wealth of experience when it comes to advising on all forms of tax mitigation, so contact a member of the team if you are considering your estate planning needs.