Making Gifts of Property: Key Points to Consider

In the run-up to the Autumn Budget (which is in just 8 days’ time), we have seen an increased interest in clients gifting residential property and land to younger generations. This uptick likely reflects speculation in recent headlines about a potential tightening of the inheritance tax (IHT) rules around lifetime gifts and the introduction of new property-related taxes. Making such gifts can be an effective way to transfer wealth, potentially free of inheritance tax. However, whilst these gifts may sound straightforward, there is a lot to consider.

IHT

A gift of property during a person’s lifetime may have IHT implications, either immediately, if the gift is made into trust, or on death. The rates of IHT are currently 20% for chargeable lifetime transfers (typically a gift into trust) and 40% on death. Where the property gifted is of a high value, the potential IHT liability arising from a gift may be significant.  It is essential that the potential IHT exposure is understood by the individuals involved (including the recipient) and there is plan for funding the tax, if it becomes due. 

The IHT implications of the gift are more complex if the person making the gift (the donor) wishes to continue occupying the property or receive some other benefit from it, such as rental income. Such arrangements will usually fall foul of the gift with reservation of benefit (GWR) regime and, if so, will not be effective for IHT planning purposes, and under current rules also has a punitive effect in capital gains tax (CGT) terms on the death of a donor. Exemptions to the GWR regime do exist, but the rules are technical and specialist advice is crucial to avoid common pitfalls.  It is essential that this is considered before any gift.

CGT

A gift of property is a disposal for CGT purposes. CGT is payable on the gain, which is generally calculated by reference to the market value at the date of the gift, less the acquisition cost.  The rapid increase in property values in recent years means the potential taxable gain could be substantial, particularly where a property has been held for many years. Relief may be available where the property has been the donor’s main residence, but the availability and scope of relief will depend on the specific facts. 

Stamp Duty Land Tax (SDLT)

If the property to be gifted is subject to a mortgage, consideration needs to be given as to whether the mortgage will be repaid prior to the gift or whether the recipient of the gift is to take responsibility for the outstanding mortgage. If the latter, the gift may have SDLT implications for the recipient.

The gift may also affect the SDLT position of the donee if they did not previously own property or if they acquire additional property and the potential tax saving should be balanced against this future cost.

Structure of the gift

Careful thought needs to be given to whether to gift property to certain individuals outright or into discretionary trust, for the potential benefit of a number of individuals. Gifting property into a trust structure is asset protective for the underlying beneficiaries as it avoids giving any of the beneficiaries absolute control or rights over the property. However, the immediate and ongoing tax implications of such a gift into trust are more complex and need to be fully understood before implementation.

A gift to an individual also has practical implications. The property will form part of their estate for IHT purposes and will be subject to financial claims from third parties e.g. on divorce. The recipients will therefore want to think about their own succession planning in the context of receiving a gift.

For clients considering a gift of property, early advice is essential to identify the tax and practical risks involved and to develop a clear plan that balances those risks against the potential to meet the client’s long-term IHT planning goals and wider family objectives.