Gifting Property to Your Children.

It may be considered your desire to gift property to your children, either to remove it from from your estate for inheritance tax (IHT) purposes or possibly to protect the property from being used to pay for care should you need it.  

However, even though the intention of gifting the property is straightforward, the tax implications are not. There are anti-avoidance rules you will need to consider. 

Gifting the family home 

A person’s home is likely to be one of the most valuable assets they own. If the value of an estate is more than the available nil rate bands, reducing the value of the estate can reduce the inheritance tax payable on their death.  

Gifting away the family home may achieve a reduction in a person’s estate. However if this is something you are considering, it is essential to take into account both IHT and capital gains tax (CGT), and particularly anti-avoidance rules that apply if the donor remains living in the home after they have gifted it to the children. 

Inheritance tax and what to consider 

At the time that the gift is made, there is no IHT to pay. The gift is a potentially exempt transfer and will be free of inheritance tax as long as the donor lives for at least seven years from the date the gift was made. If the donor dies at least three years after making the gift, the rate of tax payable on the gift where it is not covered by the nil rate band is reduced. 

The nil rate band is £325,000 (for 2022/23). There is an additional nil rate band (the ‘residence nil rate band’) which applies where a main residence is left to a direct descendant, such as a child or a grandchild. This is set at £175,000 (for 2022/23) but is reduced where the value of the estate is more than £2 million by £1 for every £2 by which the value of the estate exceeds £2 million.

If a person dies less than seven years after gifting away their home to their children, the gift will be taken into account when valuing their estate at death.

Capital gains tax 

If a person gives their home to their children, there is a disposal for CGT purposes. As a child is a ‘connected person’, the disposal proceeds are deemed to be the market value at the date of the gift. However, as long as the property has been the donor’s only or main residence for the whole period of ownership (or whole period less the final nine months (or 36 months if they have gone into care)), the main residence exemption will apply to shelter the gain in full. If the full gain is not sheltered by the exemption, some CGT may be payable by the donor. 

The children will acquire the property at its market value at the date of the gift. If they subsequently sell it, CGT will be payable if the property is not their only or main home.  

If instead, the property had remained in the estate and passed to the children at death, they will acquire it at the market value at death.  

Gifts with reservation 

A person may wish to gift their home away before they die so that it is removed from their estate for IHT purposes (assuming they live at least seven years after making the gift). However, they may also want to continue to live in it. However, the HMRC will not allow a person to ‘have their cake and eat it’ and there are anti-avoidance rules that apply where a person continues to benefit from an asset after they have given it away.  

The ‘gifts with reservation of benefit’ rules effectively render the gift null and void for IHT purposes. Rather than being a potentially exempt transfer which falls out of charge if the donor survives seven years from the date of the gift, the property will still be considered part of the donor’s death estate.  

However, there are some steps that can be taken to prevent the gifts with reservation rules from applying. If the intention is both to give the property away and to continue living in it, this can be achieved if the donor (say) gives their home to their child and rents it back from them. For this to be successful in preventing the gifts with reservations rules from biting, the donor must pay a market rent for the property. However, this assumes that the donor has sufficient income to do this. Further, the rent will be taxable in the hands of the recipient. 

If a gift is made with a reservation of benefit and that benefit is lifted, the gift becomes a potentially exempt transfer at that point, and the clock starts its seven-year countdown. This situation may arise if, for example, the donor gives his or her home to a child and initially lives in it rent-free. If the donor then starts to pay the child a market rent for the property, the reservation of benefit is lifted, and the property becomes a potentially exempt transfer at the point at which the donor starts to pay a market rent. 

ount charged to tax is reduced by any rent actually paid. If the donor pays a market rent, they will not be subject to the pre-owned assets income tax charge. However, the recipient will be taxed on the rent they receive. 

It will not always be preferable to pay market rent to avoid the pre-owned asset charge. For example, if the donor pays tax at a lower rate than the recipient of the gift, the tax bill will be lower under the pre-owned assets rules than if the recipient pays tax on the market rent. Also, the donor will only need to find the money for the tax and not for the full rent. 

A useful tip to consider  

Care should be taken in making a lifetime gift of the family home in a bid to reduce the IHT on your estate. If you continue to live in the home, the gift will only achieve this aim if you pay a market rent for your occupation.