Gifting property to your children: What you need to be aware of

If you are considering gifting your home to your children, there are a number of tax and practical implications to be aware of. These can include capital gains tax, inheritance tax and stamp duty land tax.

Gifting property can sometimes be a tax efficient way of passing assets to the next generation. However, it is important to understand the rules before taking any action. In some situations, the tax outcome may be very different from what you expect, particularly where there are multiple taxes interacting or where circumstances change in the future.

It is also worth noting that gifting property is not easily reversed, so careful planning at the outset is essential.

Capital gains tax when gifting property

Gifting your home can give rise to a capital gains tax liability if the property has not always been your main residence.

For example, capital gains tax may apply if:

The property was previously let out
It was used as a second home, or
There were periods when it was empty and not your main residence

Although there is often full or partial CGT relief for a main home, this does not apply automatically in every case. The availability of relief depends on the specific history of the property, including how it has been used over time.

It is also important to remember that when gifting property, the transfer is treated as taking place at market value for tax purposes, even if no money changes hands. This means a taxable gain can arise based on the difference between the property’s current value and its original purchase cost.

Inheritance tax when gifting property

An outright gift of your home to your children is usually treated as a potentially exempt transfer for inheritance tax purposes. This means that if you survive for seven years from the date of the gift, the value of the property should fall outside your estate for inheritance tax.

However, complications can arise if you continue to benefit from the property after making the gift. For example by continuing to live there rent free. HMRC has anti-avoidance rules that can bring the property back into your estate in these circumstances. This is a complex area and is frequently challenged by HMRC. There are, however, ways in which you may be able to remain living in the property after gifting it to your children while still keeping it outside of your estate.

Another option may be gifting the property into a trust for the benefit of your children. Trusts can offer inheritance tax planning opportunities and provide additional protection over the property. However, they come with their own tax considerations. This includes chargeable lifetime transfers into the trust, ten-year anniversary charges and exit charges.

Stamp duty land tax when gifting property

Stamp duty land tax may be payable when a property is transferred to your children if there is any chargeable consideration.

Consideration is usually the amount paid for a property. However, it can also include a mortgage or loan secured on the property that your children take over as part of the transfer.

This means that stamp duty land tax can still apply even where no cash changes hands. In some cases, this can lead to unexpected costs, particularly where there is an outstanding mortgage on the property.

It is therefore important to review any existing borrowing arrangements before proceeding with gifting property.

Non tax implications

Even if a property transfer appears attractive for tax reasons, it is important to consider the wider consequences.

Once you have gifted your home, it legally belongs to your children. This can expose the property to risks such as:

Family disputes
Divorce
Bankruptcy or creditor claims

In some cases, this could result in your family losing the property and therefore should not be lightly. We would recommend legal advice is taken before making such a gift.

Summary

Gifting your home to your children can have significant tax and non-tax implications. Because the rules are complex and the consequences can be long-lasting, it is important to seek professional advice before proceeding.

A full review of your wider estate may also identify alternative planning options or more effective ways to reduce your overall tax exposure.

If you are considering gifting property, our tax team can help you understand the implications. They can also explore the most suitable options based on your individual circumstances.