How To Gift Your Property And Manage The Impact Of Inheritance Tax

For many families, their home is their biggest asset. It’s no surprise that an increasing number of parents are considering gifting property to avoid the reach of Inheritance Tax. According to Land Registry data, over 130,000 properties are given away annually. This figure surged to 152,000 in 2023 and is set to climb to around 220,000 this year, as projected by estate agent Hamptons through a Freedom of Information request.

This trend coincides with Chancellor Rachel Reeves’s latest reforms. In her Autumn Budget Statement 2024, she initiated a £2bn Inheritance Tax overhaul. The measures included freezing tax-free allowances until 2030 and applying a 40% charge to pensions starting in 2027. These changes are expected to attract thousands more families into the net of this tax, particularly as house prices continue to rise.

UNDERSTANDING THE BASICS OF INHERITANCE TAX ALLOWANCES

Inheritance Tax is currently applied to estate values exceeding £325,000. However, homeowners can pass on an additional £175,000 to direct descendants through the residence nil-rate band. Couples can combine these allowances, creating a total tax-free limit of up to £1 million. But with property values often breaching these thresholds, families are looking for alternative strategies.

One popular option is gifting property during your lifetime, which can reduce your tax exposure. However, this is not as straightforward as it sounds. Complex rules govern property gifting, and failure to comply could saddle your heirs with significant tax liabilities.

CAN YOU ELIMINATE THE TAX BY GIFTING A PROPERTY?

Consider a couple with a £1.3 million estate, including a £300,000 property. By gifting the property correctly, they could potentially sidestep a £120,000 tax bill. This hinges on the sevenyear rule under “potentially exempt transfers” (PETs). If the donors survive seven years after gifting the property, it exits their taxable estate. If death occurs within seven years, taper relief applies on a sliding scale, reducing the tax liability.

For instance, inheritance levies drop to 32% in year three, 24% in year four, and so forth. Starting property gifting early can thus offer a significant advantage, especially for younger individuals who are more likely to outlive the seven-year window.

WHAT HAPPENS IF YOU CONTINUE TO USE THE GIFTED PROPERTY?

Gifting property while retaining the right to live in it creates complications. If the donor continues to derive benefits from the property, it becomes a “gift with reservation of benefit.” This means the property remains part of the estate for tax purposes, and the beneficiaries may face a tax bill after the donor’s death. To avoid this, the donor must pay market-rate rent if they wish to keep living in the property.

Failure to do so resets the seven-year clock, requiring another seven years of compliance to remove the property from the taxable estate. HMRC closely monitors these arrangements and can reclassify gifts as part of the estate if it determines strings were attached. Social visits are allowed, but anything resembling regular usage—such as staying over every weekend—could bring the property back under scrutiny. Strict rules like these aim to prevent individuals from exploiting gifting loopholes.

GIFTING PROPERTY AND CARE FEES

There are additional risks when you gift property, particularly concerning care fees. If a council believes you deliberately relinquished ownership of a home to reduce your liability for these fees, it might include the property’s value in its assessment. This decision is based on the likelihood that the individual knew they would need care when transferring the property. It is, therefore, essential to tread carefully and seek professional advice before acting.

WHAT IF YOUR PROPERTY HAS AN OUTSTANDING MORTGAGE?

Gifting property is relatively straightforward if it’s mortgage free. However, an outstanding mortgage introduces complications. The lender must approve the transfer, and the new owner—your children—may need to pass affordability checks. Stamp Duty Land Tax may also apply to the value of any mortgage debt transferred with the property, further increasing costs.

HOW TO TRANSFER PROPERTY OWNERSHIP LEGALLY

Gifting property involves drafting a deed of gift—a legal document formalising the transfer—and updating ownership details with the Land Registry. Transferring only the beneficial interest while leaving legal ownership unchanged is possible. However, this complex arrangement still creates a taxable event and demands careful documentation. Minors can hold a beneficial interest in a property, but they cannot be legal owners. To prevent difficulties down the road, it’s advisable to consult with experts when structuring property transfers like these.

SEEK PROFESSIONAL GUIDANCE WHEN PLANNING FOR THE FUTURE

Navigating the rules around gifting property and managing the implications of Inheritance Tax can be challenging. While gifting your home might seem simple, the potential pitfalls require careful planning and professional advice. From understanding taper relief to complying with HMRC’s strict guidelines, numerous aspects must be considered to ensure your heirs are not left with unexpected obligations.

>> ARE YOU CONSIDERING GIFTING A PROPERTY? <<

Whether you’re exploring your options, need expert advice, or want guidance every step of the way, our team is ready to provide personalised support tailored to your unique situation.

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