Families worried about ever increasing house prices and the impact of inheritance tax on their estates often consider gifting property to children.
But the rules and financial implications of signing a home over to someone else can be complicated and costly.
Although homeowners or buy to let landlords can sign over a home at any time, they need to be aware of the personal and financial consequences.
Gifting buy to let property or second homes that have never been the owner’s main home are likely to trigger capital gains tax bills.
It’s easier to give property that has been a main home, but here are some of the key points to think about before signing on the dotted line:
PETS or potentially exempt transfers are useful devices for avoiding inheritance tax.
Basically the rule says providing the donor lives for seven years after the gift is made, no inheritance tax is due. Meantime, if the donor dies before the seven years are up, tax is paid at less than the 40% rate, depending on the duration between the gift and death.
Gifts with reservation of benefit are the catch.
To qualify as a PET, the gift must be with no strings attached. That means the donor gives up any right to income from the property and if they continue to live there, they must pay a market value rent equivalent to that a private tenant would pay.
Arrangements like ‘you own the property but I can live there rent free until I die or go into care’ are not allowed and mean the donor still controls the home, making it part of their estate when they die.
Gifting also means the new owner can sell or rent out the property without the donor’s permission.
Other factors also come into play. For instance, if the new owners divorce or are declared bankrupt, the gifted property would be included as an asset in any settlement.
The donor also has to consider deliberate deprivation of assets. In some cases, local councils have argued that gifting property to avoid paying care home fees and have won the right to ignore the hand over.