Gifting property to children: the tax implications - Times Money Mentor (2024)

Gifting property to children or family members is not only extremely generous but it can help reduce inheritance tax. We explain how it works and how to avoid certain pitfalls.

It can reduce inheritance tax for your loved ones when you die and it could cut your tax bill while you’re alive too. We explain the complicated tax rules around gifting property so you can decide if it works for you.

In this article, we outline:

• Can I gift my property to my children or a family member?
• Should I transfer my home to my children?
• How to avoid capital gains tax on property
• Whether you have to pay stamp duty on gifted property
• What are some of the tax implications of gifting property in different scenarios?

Read more: What is the inheritance tax threshold?

Can I gift my property to my children or a family member?

Yes, you can gift a property to a loved one, whether that’s a partner, a child or someone else. But you need to be aware of the complicated tax rules around this.

Whether you incur a tax bill will largely depend on:

• Who you have gifted the property to
• Whether the property is your main home

Gifts are usually exempt from inheritance tax (IHT) if:

• They are below the nil rate band of £325,000
• The giver survives for more than seven years (more on this later in the article)

However, if you gift a house to a family member but continue to benefit from it in some way, it would remain as part of your estate when you die.

This means HMRC could tax your loved ones at a rate of 40% for anything over the tax-free threshold.

Since 2017, the tax office has clawed back £608 million from families because of misunderstandings about the rules.

Should I transfer my home to my children?

One of the big reasons people decide to gift property is to reduce their inheritance tax bill.

Your estate (a catch-all term for property, savings and possessions) can be charged at a maximum rate of 40% when you die.

But it is only charged if your estate is valued above a certain threshold:

• This threshold known as the nil-rate band is set at £325,000 until 2028
• If your children or grandchildren inherit the property when you die, you get an extra £175,000 (this includes adopted, foster and stepchildren)
• This means your tax-free threshold could be £500,000, provided the value of your estate is under £2 million

It’s different if you pass your estate to a spouse, civil partner or charity, as no IHT is due.

If you give away parts of your estate, such as your home or a buy-to-let flat, before you die, you can reduce the value of your estate and lower the inheritance tax bill.

Or you could be tax savvy (and generous) by giving your son or daughter the cash you generate from a house you rent out.

Do I pay tax if I am gifted a property?

It depends. If your husband, wife or civil partner has gifted you property then you won’t have to pay inheritance tax.

But if you have been gifted a property from a parent, you might have to pay stamp duty if there is a mortgage on the property.

There’s also a risk that if they died within seven years of transferring ownership of that property to you and their estate exceeds their inheritance tax threshold then there might be an extra bill to pay there too.

When it comes to capital gains tax, it’s the person selling or gifting the property who would be liable to pay this and not the receiver of the gift.

This only applies if the property the person is gifting isn’t their main home.

For example, if a parent has given you a buy-to-let property they might have to pay capital gains tax on it, but you won’t have to worry about paying it.

How do I avoid capital gains tax on gifted property?

When gifting a second home or buy-to-let property, you might have to think about capital gains tax.

But there are some exemptions.

1. Transferring property to a spouse or civil partner

You can transfer a property to a husband, wife or civil partner without incurring a tax bill, even if you already own a home.

This only applies if:

• You aren’t separated
• Have lived together during all of that tax year

If you are a higher rate taxpayer and your partner is a low earner, it might make financial sense to transfer a second home or investment property to them.

If your lower earning partner later sells the house, they might have to pay tax on any gain they have made. The tax-free allowance for CGT is currently £12,300 but will fall to £6,000 in April 2023. Our guide on the CGT thresholds and rates explains more.

The tax is calculated based on the difference in value between when you first bought the house and when your partner sold it. But if they are a low earner and there is capital gains tax due on the property they will pay a lower rate of tax.

Or as a married couple, you could make sure the property is in both your names. This would allow you to use both of your tax-free allowances when it comes to selling it. This means your tax-free allowance doubles to £24,600.

2. Transferring your main home to children

Another way of gifting property without paying capital gains tax is to pass property that is your main home to one of your children. This means you can get what’s known as private residence relief.

You must have used the house as your main residence for the entire time you owned it.

However, the rules are different if you are gifting a property that isn’t your main residence such as a second home or buy-to-let.

You will be liable to pay capital gains tax if the property is worth more than when you bought it and that increase is beyond the CGT threshold.

Gifting your main home to your children while you’re alive could reduce your inheritance tax bill when you die too.

However, bear in mind that if you give the property to your child and continue living in the property, you have to pay market rent to your child if you want it to sit outside of your estate for inheritance tax purposes.

If you pay a small amount of rent or none at all then the house will remain as part of your estate, meaning your loved ones could still be hit with a hefty IHT bill when you die.

Gifting your family home to your child means you are no longer the homeowner and have no rights to the property, so it’s not a decision that should be taken lightly.

Do you have to pay stamp duty on gifted property?

It depends on whether there is a mortgage on the house:

• Your child won’t have to pay stamp duty if there is no mortgage
• If there is, they will have to pay stamp duty on the value of the outstanding loan

Your bank or building society will need to agree to the transfer of equity before you can give it away. This is to check whether your loved one will be able to afford the mortgage repayments. Use our tool to calculate your mortgage repayments.

If your child is earning a lot less than you and can’t afford the mortgage, a lender might not agree to you transferring the loan into their name. But you could think about acting as a guarantor on the mortgage.

For tips here are some ways to avoid stamp duty.

Tax implications of gifting property in different scenarios

Below we run through some scenarios where you may be looking to gift property.

1. “I want to downsize and give my house to my son and his family”

There could be some serious tax savings here. Gifting your home while you are alive means there will be no inheritance tax payable as long as you:

• Move out or pay market rent to your children
• Live for seven years after the handover (you only need to worry about the seven year rule if you give away more than £325,000 in gifts in the seven years before you die).

This gift would be known as a “potentially exempt transfer”. If you pass away within seven years it becomes a “chargeable transfer” and is added to the value of your estate for IHT purposes.

The full 40% inheritance tax rate will apply if you die during the first three years after the transfer of equity, but it then drops year by year.

We explain how the seven year rule works here.

So it makes sense from a tax point of view to gift the property sooner rather than later.

Bear in mind that you can’t continue living in the property rent-free. Doing so would make IHT still payable on the house, even if you live for seven years.

You can stay in the property and avoid inheritance tax if you pay market rent. However, your son may be liable for income tax on the income.

Gifting part of the property

Another option is that you live in the house together and gift just part of it to your son. His portion would be disregarded in the valuation of your estate, subject to the seven-year rule.

Be aware though that if you outlive your son, the house or his part of it could then be inherited by his beneficiaries.

There are a few other matters to consider:

• Gift your house to your son now and he won’t have to pay stamp duty, provided you have no mortgage on the property
• No CGT to pay as long as the house was your main residence for the whole time you owned it
• If you are thinking of gifting your property to avoid paying for care when you’re older, be careful: your local authority might regard such a move as a “deliberate deprivation of assets”
• Another risk is that the transaction could be voided if you go bankrupt within five years of making it, which could leave your son and his family members homeless
• Alternatively, if your son were to go bankrupt after you’d gifted the property, he could risk losing the house

2. “I’ve bought a buy-to-let and want to give it to my daughter for her 18th birthday”

If you transfer a buy-to-let property to someone other than a spouse or civil partner, you have to pay capital gains tax on the profit you make just as if you’d sold it.

The first £12,300 of gains will be tax-free (this falls to £6,000 in April 2023). Profits higher than that are taxed at different rates:

• Basic-rate taxpayers pay CGT at a rate of 18% for gains on rental property
• Higher-rate taxpayers pay 28%

Depending on the value of your estate when you die, paying CGT now could still be cheaper than the potential inheritance tax bill.

As with any gift of this type, you will need to live for another seven years to escape inheritance tax on it altogether.

Giving your daughter this generous present, rather than renting the property out, would also reduce the amount you pay in income tax. This could be beneficial if you are a higher-rate taxpayer.

Tax-free earnings for your daughter

The gift could also bring favourable tax treatment for your daughter if she chooses to let out the property.

This is because the first £12,570 of rental income will be tax-free because it is below the personal allowance. Many students don’t claim their full tax-free personal allowance because they don’t earn enough.

If there is no mortgage on the property, your daughter does not have to pay stamp duty. If there is a mortgage, stamp duty will be due on the value of the outstanding loan.

Your lender will need to approve the transfer of equity before you can give it away. It will check whether your daughter will be able to afford the mortgage repayments.

“Getting a lender to greenlight a buy-to-let mortgage transfer to such a young person will be very difficult, but not impossible,” says property tax expert Jackie Hall from the accountants RSM.

The bank might ask the parents to guarantee their daughter’s mortgage repayments.

3. “Can I save tax by passing my holiday cottage into my husband’s name as he earns less than me?”

Transferring ownership of a property to a lower-earning spouse or civil partner can be a good idea for higher-rate taxpayers.

If there is no mortgage on your holiday cottage and you transfer the property to your husband, he would not have to pay stamp duty on the transfer. If you do have a mortgage on this house, your husband would have to pay stamp duty.

Your bank would also have to agree to the transfer of the mortgage to him, which could be tricky if he is earning considerably less than you.

It might take some negotiation, but you could offer to guarantee the mortgage.

The good news is that because you are married, there are no capital gains tax implications. Another advantage would materialise if your civil partner sold the cottage eventually.

If he is a lower-rate taxpayer at the time, he may pay a lower rate of CGT. This is only if the cottage was given to him in a proper transfer. It would only be the case if you don’t retain any interest in the property.

4. “I have a buy-to-let and want the rent to be paid straight to my step-son to give him some spending money at university”

You could use the rental income from your buy-to-let property to support your step-son financially, but that would not lower your own tax bill.

You would still pay income tax on all income you draw from this property, even if you don’t personally receive it.

A way around this could be to transfer an interest in the property to your step-son.

You would have to pay capital gains tax as though you had sold the share of your property at market value. But paying tax on a small slice of your buy-to-let is obviously cheaper than paying it on the whole property.

The taxman sometimes allows an uneven division of income between shareholders of a property. For instance, if one party receives a gifted interest of say only 10%, they might be entitled to a share of say 50% of the rental income.

But it will be difficult to justify this kind of agreement to the taxman, so it’s best to take specialist advice. This is especially true if you are only looking to support your step-son financially on a temporary basis while he studies.