Gifting Property to Children

You can gift your home to your adult child, another family member, or a spouse. However, this might mean you're liable to pay Capital Gains Tax.

The transfer can be structured as a standard sale and purchase under market value, a deed of gift, or a transfer of equity. If a mortgage is involved, then the lender's approval is necessary.

Since children under the age of 18 can't legally own property, a trust is required with an adult acting on the child's behalf.

CGT is different for married couples compared to gifting property to children. This article focuses on how to gift property to children and other family members. If you're wondering how to best protect a gifted property in the event of a divorce, a prenuptial agreement might be suitable.

Can I gift my house to my child?

Yes, you can gift your property for nothing or less than its worth. You must be of sound mind and not acting under pressure from anyone else, and you must be the registered owner at the HM Land Registry.

When transferring ownership of property from parent to child, spouse or family member, you need to choose the quickest and most affordable route. There are four ways to gift your property:

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

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.

Gifting a house to a child

If you are gifting property to a child under the age of 18, you can do so with a 'bare trust' or more formal trust which is a legal entity in its own right.

The gifter appoints trustees, which may include themselves, to manage the asset(s). The property and any net income legally belong to the child. Once they turn 18, they can do what they like with it.

When parents place a rental property into a trust for a child under 18, the income will be taxed on the parents as if they still owned the asset. Gifts valued over the nil rate band made to trusts are 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 to children:

Insolvency

The transaction could be voided if you are made bankrupt within five years of gifting a house.

Inheritance Tax

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

Inheritance tax is payable on your total estate (plus gifts made in the 7 years preceding death) over £325,000. This tax-free allowance exceeds £500,000 if the total estate is worth less than 2 million and includes your primary residence, which is given to your children (including fostered and adopted children). When one spouse dies, their remaining allowance can be carried over to the surviving spouse.

If you die within 3 years of gifting the property, the full 40% inheritance tax will be payable.

If you survive at least 3 years after making the gift, but less than 7 years, Inheritance tax will be applied at a tapered rate on a sliding scale.

If you continue living in the house after gifting it, you must pay full market rent, or else you are still benefiting from the property. As a result, it will be included in your estate for inheritance tax.

Capital Gains Tax

Capital Gains Tax applies to the increase in the property's value since you acquired it, minus any costs related to improvements and associated expenses such as legal fees, Stamp Duty, and estate agent's fees.

You do not have to pay CGT when gifting your primary home. If the property you are gifting is not your main residence—like a second home given to a child or another relative—CGT may be applicable. In this case, the tax would be calculated based on the market value of the property, rather than just the amount it was gifted for.

Care home fee avoidance

If you are gifting your property to avoid care home fees, then this could be viewed by the local authority as a deliberate deprivation of assets.

You need the money back

A gift is not a loan, and you have no legal right to enforce the repayment of the gifted property. You create a loan agreement instead of transferring property ownership from parent to child.

Capital Gains Tax on gift of property to child

Capital Gains Tax is payable on the market value of the property or a percentage of the property being gifted.

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

Need Tax Advice on Your Property Transaction?

• Get up-to-date property tax advice on SDLT, CGT, IHT, personal vs partnership vs company structure.
• Free 15-minute initial consultation with a qualified accountant from our panel of tax advisors.
• Ask your tax questions and get guidance on what you can do next.
• If further accountancy work is required, you'll be quoted for this as a separate piece of work with no obligation to purchase.

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The legal process of gifting property to a family member

We run through the legal process for each of the above routes to transfer house ownership to a family member or spouse.

• 1
  Sale and Purchase for Gifting a House

Whether the transaction is for full market value or less, if you are gifting a property that has a mortgage, you will need to follow the standard sale and purchase process. Here are the key stages involved in selling a property to family members:

• Seller and buyer get independent solicitors.
• Seller completes standard protocol forms such as fittings and contents forms.
• Buyer gets their mortgage offer.
• Buyer orders searches.
• Exchange and completion.

The conveyancing process typically takes about 4 to 8 weeks to complete because you will be obtaining a mortgage and ordering conveyancing searches from the council. However, if you are purchasing a leasehold property, it may take longer since the seller needs to obtain the leasehold management pack.

We can handle the entire process, from conveyancing to arranging access for your surveys and ordering searches for you.

• 2
  Deed of Gift/Transfer By Way of Gift

The parties leaving the title are unrepresented unless they choose to get a solicitor, and the process is as follows:

• New owners get a solicitor to handle the transfer.
• TR1 is drafted and sent to the Transferor (current owners) and Transferee (new owners).
• Current owners get their ID1 form verified by a solicitor and obtain independent legal advice regarding the Transfer.
• Completion takes place.

This process is typically completed much faster, usually within 3 to 4 weeks. The most time-consuming aspect is having the ID1 form verified and obtaining legal advice regarding the transfer, especially if the current owner resides overseas. We can get your ID1 form verified, so please contact us if you need help.

• 3
  Transfer of Equity

Where one or more of the original owners will remain on the legal title, the transfer can occur as a transfer of equity. The party leaving the title is often unrepresented.

• New owners and remaining owner(s) use the same solicitor.
• TR1 is drafted and sent to the current and new owners.
• Leaving owner gets their ID1 form verified by a solicitor.
• Completion takes place.

A Transfer of Equity takes a similar time to complete as a deed of gift; however, it can take longer if the property is leasehold or there is a mortgage that requires the lender's consent for adding children's names to house deeds/mortgage.