Gifting to the next generation: it’s all about property

Making a gift of your property can reduce the overall value of your estate and therefore the Inheritance Tax payable on your estate on death. However, you would need to survive seven years from the date of the gift in order for the value of the gift to fall out of your estate. If you survive seven years then there is no Inheritance Tax to pay. If you die within seven years, the value of the gift is brought back into your estate for Inheritance Tax purposes. The current Inheritance Tax allowance of £325,000 is applied in priority against failed lifetime gifts and any amount above £325,000 is taxable at the rate of 40%. A sliding scale called taper relief is then applied if the death occurs between three and seven years after the gift, reducing the tax rate based on the time elapsed.

Gifting your property is a deemed disposal for capital gains tax (CGT). CGT would be chargeable on the gain in value between the date you acquired the property to the date of the gift.  If you are giving away property that has been your main residence, then private residence relief (PPR) is available. PPR exempts the gain from CGT if you have lived in the property as your primary residence for the entire period of ownership (although PPR is also available in certain circumstances for periods of non-occupation). However, if you are gifting a second home then CGT would be chargeable on the gain in value even if you are making a gift. In addition, if you are gifting property that is mortgaged, stamp duty land tax may also be chargeable. 

If you decide to give away your property to your children and continue to live in it rent-free (or retain a benefit from it in any other way), you might be caught out by the gift with reservation of benefit rules. Under those rules, the value of the property you have given away is treated as still part of your estate for Inheritance Tax purposes. In order to avoid falling foul of the rules, you would need to ensure that you do not retain a benefit from the gift of the property and if you need to occupy the property, you will need to pay market rent for your occupation of it.  Even if rent is paid, occupying a property you do not own also presents risks if the owner should die, divorce or become bankrupt.

Gifting your primary home could reduce the resources available to you in the future, particularly when you might need them to cover care costs or other expenses in your later years.

Gifting residential property is not without its challenges and care must be taken in finding the right approach for the relevant outcome. There could be alternatives to gifting property such as purchasing financial products, making gifts out of surplus income, and making use of your annual exemption and small gifts exemption. The key is to seek professional advice at the right time to find the best approach that fits with your estate planning objectives, whilst ensuring that you have all you need in the latter years of life.  

Sarah Ahchoon is a senior associate in the private client team.