How to give away your house
By Selina Doggett and Charlotte Coe
There were some big changes to Inheritance Tax (“IHT”) announced in the recent Budget but the freezing of the nil rate band at £325,000 and the residence nil rate band at £175,000 until April 2028 is one that has gone under the radar. However, as property values increase more and more people will fall into the IHT net, based largely on the value of their home. As such some may consider gifting their home to the next generation, but this is far from straightforward.
The gift
Whilst the gift would be a disposal for capital gains tax, no tax should be payable if you have always occupied it as your home.
For inheritance tax purposes the gift would be a potentially exempt transfer and exempt from inheritance tax if you were to survive 7 years from the date of the gift.
If there is a mortgage outstanding on the property, there could be Stamp Duty Land Tax implications that need to be considered.
Can I still live in the property after I have gifted it?
If you continue to live in the property rent free after the date of the gift, then you would be caught by the Gift with Reservation rules which would mean that the property still falls in your estate for inheritance tax purposes even if you survive for 7 years. If you can avoid these rules through clever planning, you may still be subject to an annual income tax charge based on the value of the property.
To avoid both these issues, you could pay full market rent for the use of the property. This would be taxable rental income in the hands of your children. The level of rent paid would need to be reviewed on a regular basis to ensure it was still market value.
Alternatively, if you were to live in the property with your child and only give a share of your home away then the tax issues could potentially be avoided although you would need to pay at least your fair share of the bills.
As you will see careful consideration is needed when considering gifting your home to your children. If you would like further information around your options then please do not hesitate to contact us.
For further information and guidance please contact Selina Doggett or Charlotte Coe who are based in our Cambridge office.
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