For most people, the home we live in is our most valuable asset. It is important to ensure our loved ones can gain the maximum benefit from it after we die. Making a gift of property is becoming an increasingly popular option for homeowners who want to help their families or a charitable trust avoid paying a sizeable Inheritance Tax bill. The property can be anything from the main family home or a second or holiday property, but transferring it to another person as a gift is an intricate process and does require some careful consideration.
Deed of Gift
If you make an official Deed of Gift of your property, the recipient will not be required to pay you anything for the gift, and will not be liable to pay Stamp Duty, Capital Gains Tax or Income tax on the value of the property. A Deed of Gift is a legally binding document used to transfer the ownership of a property to another individual without any payment changing hands and needs to be witnessed by two disinterested parties who have no stake in the transfer of the property.
In Scotland, a Deed of Gift would come under the Land and Buildings Transactions Tax regulations, which state that land or buildings may be gifted or the ownership transferred to another person for ‘no chargeable consideration’.
Gifting property with a mortgage
It is possible to make a gift of a property to another individual while the property still has a mortgage.
However, you would need to be sure that the new owner would meet the eligibility criteria of the lender before you made the transfer. Some lenders have restrictions on property transfers if the property is a “buy to let”, or if the potential transferor would still be living in the home. If these restrictions cannot be overcome, the mortgage would need to be paid off before the transfer was made.
Gifting property before you die
If you decide to move out of the property and make a gift of it, provided you live for a further seven years after you have made the gift, the recipient will not be liable for Inheritance tax. This would be a Potentially Exempt Transfer (or PET).
If you make a gift of the property but still want to live in it after you have given it away, in order to avoid the new owner having to pay Inheritance tax, you would need to live there for a further seven years and pay rent and your share of the bills at the market rate. If you have only given away part of the property, or if the new owners also live in the property, you would not have to pay rent.
Stamp Duty on gifted property
If you, as an individual, have received property or land as a gift and there is no mortgage outstanding on the property, you will not be liable for Stamp Duty Land tax.
If there is an existing mortgage, you would have to pay Stamp Duty if the value of the mortgage exceeds the Stamp duty threshold.
The tax is calculated differently if the property is in Scotland, where you would pay a Land and Buildings Transaction Tax. In Wales, you would pay a Land Transaction tax.
For residential properties, the Stamp Duty Land Tax threshold is currently £500,000 (decreasing to £125,000 after 1st April 2021), and for non-residential land and properties, it is £150,000.
Stamp Duty and Inheritance tax on property
You don’t pay Stamp Duty or Income Tax on inherited property. Exemption from Stamp Duty will apply even if you take over an outstanding mortgage on the property you have inherited, provided no other consideration is given.
If the total Estate value (including money, property and possessions) is less than £2 million, or below the threshold of £325,000 there is no Inheritance Tax to pay. Additionally, there is no Inheritance tax liability if the value exceeds £325,000 and the property has been left to your spouse or civil partner, or a charity or a community amateur sports club.
If the property is left to somebody other than your spouse or civil partner, for example, your child (including an adopted, fostered or stepchild) or a grandchild, the threshold for Inheritance Tax increases to £500,000.
If inheriting a property means you now own two homes, you must decide which one of them to nominate as your main home, and then inform HMRC within two years of inheriting the property. If you don’t inform them and then you sell one of the properties, they will make the decision themselves as to which property was your main home.
Agricultural land or property as a gift is exempt from Inheritance Tax, whether the gift is made before or after your death. It must meet certain conditions, for example, it must be land or pasture that is used to grow crops or rear animals intensively and must be part of a working farm in the UK, Channel Isles, or the Isle of Man.
There are also restrictions relating to the period of ownership or occupation of the land. Some farm machinery and other assets are not exempt.
Full guidance on what qualifies as agricultural land is available here: Agricultural Relief for Inheritance Tax on GOV.U
How much Inheritance Tax might I need to pay?
If someone dies within seven years of having gifted their property, unless they fall into the exempt category (i.e. spouse or civil partner) the person receiving the gift will be liable to pay Inheritance Tax on the value of the property over £325,000 or over £500,000 if that person is the child or grandchild of the donor.
If your estate is worth less than your Inheritance Tax threshold, and you are married, or in a civil partnership, the amount of the unused threshold can be added on to your partner’s threshold after your death.
For 2020/2021 Inheritance Tax at the standard rate is 40%, and would be applied to that part of the value of the inherited property which is more than the threshold of £325,000. If for example, the house you have been gifted is worth £400,000 and your tax-free threshold is £325,000, you would be liable for Inheritance tax at 40% of £75,000.
You would need to start paying the Inheritance tax by the end of the sixth month after the person died.
HMRC introduced a tapering scale for Inheritance tax liability, depending on how many years before the death of the donor, the gift was received. The amount payable decreases closer to the date of death.
Years between date of death and the gift % of tax due
Less than 3 years - 40%
3 to 4 years - 32%
4 to 5 years - 24%
5 to 6 years - 16%
6 to 7 years - 8%
Over 7 years - 0%
Capital Gains tax on the sale of gifted property
Sometimes a gift of property or land is made to an individual who would prefer to have the cash instead, so they decide to sell it. In that case, the usual Capital Gains tax rules would apply.
No Capital Gains is payable on the gift if it is made to your spouse or civil partner unless you separated and were not living together in that tax year.
If your spouse or civil partner then decides to sell the property at a later date, they will have to pay Capital Gains tax based on the difference in value between the date when you first owned the property, and the date they sold it. If this was prior to April 1982, they can work out what the gain would have been as at 31st March 1982.