Gifting Property to Children

Thinking about gifting your home or another property to a child, spouse, or family member? This transfer can be structured in several ways, such as a standard sale and purchase (even if under market value), a straightforward deed of gift, or a transfer of equity. If there's a mortgage involved, the lender's approval is always essential.

Keep in mind that children under 18 can't legally own property directly. In such cases, a trust is required, with an adult managing the property on their behalf. This article focuses on gifting property to children and other family members.

Naturally, you'll have questions about the financial implications. Can you gift a property with a mortgage still on it? (Often yes, but you need lender approval.) Will your child have to pay Stamp Duty? (Likely, depending on value or mortgage liability). What about Capital Gains Tax (CGT)? (Often applies, especially for non-primary residences.)

What about the "7-year rule" for Inheritance Tax? (Gifts made within 7 years of death can be taxed.) Is it possible to put property into a trust for a younger child? (Yes, though specific tax rules apply.) And ultimately, what's the best way to gift without racking up huge tax bills? (Careful planning and professional advice are key.)

Can I gift my house to my child?

Yes, absolutely. You can gift your property for free or for less than its market value. The key requirements are that you must be of sound mind, not acting under any duress, and be the legally registered owner at HM Land Registry.

When transferring property ownership to a child, spouse, or another family member, it’s about choosing the most suitable and efficient route for your situation. There are typically four main ways to gift your property:

• 1 Sale and Purchase at full market value of the property
• 2 Sale and Purchase at under the market value
• 3 Deed of Gift, also known as a 'Transfer by Way of Gift'
• 4 Transfer of Equity

Can I gift money to my child?

Gifting money to a child to help them raise a deposit for a house is a common and acceptable practice. As long as the child can provide written confirmation to their mortgage provider that the money is a genuine gift and not a loan, it shouldn't pose any issues.

• The money must be given without the expectation of repayment. It shouldn't be treated as a loan with interest or other conditions.
• The child will need to provide a letter or declaration from the parent or donor stating that the money is a gift and there's no obligation to repay it.
• Different mortgage providers might have specific requirements for gifted deposits, so it's important to check with them directly. Some might ask for additional documentation or proof of funds.

Transferring ownership of a house with a mortgage

When the recipient (e.g., your adult child) is taking on a mortgage to "buy" the property from you, even if it's for less than its market value, they'll need to secure an undervalued mortgage offer. The lender must be fully aware that the transaction is happening at a price below the property's true market value.

For example: If a property is worth £500,000 but your child is only obtaining a mortgage for £250,000 (which is the total consideration they're paying), the mortgage lender must explicitly state within their mortgage offer that they acknowledge the property is being sold under market value.

Stamp Duty on a gifted property with a mortgage

If the mortgage lender doesn't confirm it's an undervalued mortgage offer, your solicitor will need to reflect the full market value in the contract of exchange.

In this scenario, Stamp Duty Land Tax (SDLT) will be payable on the total market value of the property, not just the amount of the mortgage or cash paid.

This type of transaction, where a house is bought for less than its worth, is known as a Concessionary Purchase.

Ultimately, gifting property with an existing mortgage means the transaction must proceed as a sale and purchase. This is because the mortgage lender requires a standard conveyancing protocol to be followed by the purchasing solicitor, ensuring their interest in the property is properly managed.

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Gifting a house to a child

If you're considering gifting property to a child under the age of 18, you can do so by establishing a 'bare trust' or a more formal trust. A trust is a legal entity designed to hold assets for a beneficiary, which is essential as minors cannot legally own property directly.

As the gifter, you would appoint trustees (who can include yourself) to manage the asset(s) on the child's behalf. Legally, the property and any net income it generates belong to the child. Once the child reaches 18, they gain full control over the asset.

It's important to be aware of the tax implications. If parents place a rental property into a trust for a child under 18, the income will generally be taxed on the parents as if they still owned the asset.

Additionally, gifts valued over the nil rate band made to trusts can be subject to an immediate charge of Inheritance Tax at 20%.

Tax liabilities and risks

These are the potential tax consequences and risk considerations for gifting property:

Insolvency

Gifting a property can have implications if you face financial difficulties later. The transaction could be voided if you are made insolvent or bankrupt within five years of making the gift.

This 'look-back' period is designed to prevent assets from being hidden to avoid creditors.

Inheritance Tax

If you die within 7 years of gifting a house, the full value of that gift is still counted as part of your estate when assessing your tax liability for inheritance tax purposes.

Inheritance tax is generally payable on your total estate (including certain gifts made in the 7 years preceding death) above the standard Nil Rate Band of £325,000.

This tax-free allowance can increase to over £500,000 if your total estate is worth less than £2 million and includes your primary residence, which is passed to your children (including fostered and adopted children).

Furthermore, when one spouse dies, their unused allowance can be carried over to the surviving spouse, potentially increasing the tax-free threshold to £650,000, or even £1 million with the residence nil rate band.

The rate of Inheritance Tax payable on such gifts depends on how long you survive after making the gift:

• If you die within 3 years of gifting the property, the full 40% Inheritance Tax will be payable on the value above any available nil rate band.
• If you survive at least 3 years but less than 7 years after making the gift, Inheritance Tax will be applied at a tapered rate on a sliding scale, reducing the amount payable.

A crucial point to note: If you continue living in the house after gifting it, you must pay full market rent to the new owner, or else HMRC may still consider it part of your estate for Inheritance Tax purposes, as you are still benefiting from it.

Capital Gains Tax

Capital Gains Tax (CGT) applies to the increase in a property's value since you acquired it, minus any allowable costs like improvements, legal fees, Stamp Duty, and estate agents' fees. When gifting property, CGT is calculated based on its market value at the time of the gift, not just any amount it was gifted for.

You do not have to pay CGT when gifting your primary residence (your main home) due to Private Residence Relief.

However, if the property you are gifting is not your main residence, such as a second home or a buy-to-let property given to a child or another relative, CGT will be applicable.

In certain circumstances, you can defer or even avoid paying CGT charges if you transfer ownership to a spouse or gift the property to a charity. We can refer you to a qualified tax advisor to review your specific tax implications at competitive prices.

Care home fee avoidance

Gifting your property with the primary intention to avoid future care home fees can be viewed by your local authority as a 'deliberate deprivation of assets'.

If this is determined, the local authority may still assess you as if you still owned the property, meaning it could be taken into account for your care costs.

You need the money back

It's crucial to remember that a gift is precisely that – a gift, not a loan. Once you transfer ownership as a gift, you have no legal right to enforce repayment or reclaim the gifted property.

If there's any expectation of repayment or a need for access to funds, you should consider a formal loan agreement instead of an outright gift or transfer of property ownership.

The legal process of gifting property

When you decide to gift a property to a family member, there are generally four distinct legal methods to choose from. While the overall conveyancing process will share similarities with a standard sale, your conveyancer must specifically notify the Land Registry that the transaction is a gift.

It's also important to remember that even if no money changes hands, Stamp Duty Land Tax might still be payable on the property's market value, depending on the specific method used.

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