Is Gifting Property to Children a Good Idea and What Are the Alternatives?

Estimated reading time 9 minutes

Gifting property to children has become quite common and with the benefits that can come from it, it makes sense that many are choosing this option. However, as with anything, there are often rules and regulations to follow.

Gifting property to children is seen as a good idea for many. It not only provides them with a place to live or rent out, but it also helps protect them from inheritance tax and gives them a place they can call home, or a place they can sell for a profit and gain some more financial stability.

So, is it a good idea to gift your home or any property you own to your children? And what are the alternatives to ensure you provide for them in the best way possible way?

Can I gift my house to my children?

You can gift your house to your children, and it can often be a great way to minimise the amount of inheritance tax paid. With inheritance tax set at 40% on estates with a value of more than £325,000, it is often chosen to gift property to reduce the tax liability.

To be able to gift a property to children you must be the property owner or where the house is in joint ownership, have the permission of the other owner to gift it. You must also be listed as the owner with the land registry, have no outstanding mortgage and ensure there is no charge secured against it.

For the property to be classed as a genuine gift to your children and therefore give them the potential tax benefit, you would be required to move out permanently or pay the current rate for rent. If the latter, your child, who would then be classed as your landlord, would have to declare that rent as income and pay the required tax on it.

How do I gift property to my children?

Before you think that it may be a simple process of just handing over the keys, you should stop and think twice! Gifting property involves several Land Registry documents being completed and, in some parts, they can be confusing. To avoid the risk of legal complications and financial penalties, we recommend you seek the advice of a solicitor.

When should I gift a property to my children?

Inheritance tax must be paid six months after the death of an individual and with its rates being a huge 40%, work is often done before death to ensure that the estate isn’t hit too hard by high taxes. When it comes to property, property is often passed on as a “transfer for nil consideration”. This means that the amount of tax paid can be reduced.

The way it works is how and when it is gifted. For example, if you were to gift your property to your children 7 or more years before your death, the value of the property will not be included in the amount of inheritance tax due to be paid.

However, the shorter the period between gifting the property and death, the higher the level of tax. For example, gifting property to children 5-6 years before death would see 16% tax paid whilst fewer than 3 years would see the full 40%.

Years between gifting and death Tax paid
Less than 3 40%
3-4 32%
4-5 24%
5-6 16%
6-7 8%
7 or more 0%

Should I gift or inherit the property?

Gifting the property to your child or children is likely to be the best way to provide for them out of these two options but it can be complex. As mentioned above, your estate will be liable for inheritance tax at 40% should its value exceed £325,000.  This rises to £500,000 if the estate includes your main home, your children will inherit it, or the total value is less than £2 million.

If you see that your property has a value that will put it over the Inheritance Tax threshold, gifting the property whilst alive will likely be a better option than leaving the home in your will for your children.

What are the taxes when gifting property?

We have already established that Inheritance Tax is likely to put a dent into the estate unless a property is gifted sufficiently early enough but there are also some caveats around this too. If you gift the property but remain living in it and do not pay any form of rent, the home is classed as being a “gift with reservation of benefit”. Properties where this occurs are then included in the estate when the inheritance bill is calculated.  

There are also two other taxes you may need to pay that you should be aware of.

Capital Gains Tax

In most cases, the property you gift to your children will not be liable for any Capital Gains Tax, as long as it is your main home. Should it be a second home or one you let, CGT will apply on any profit made at the time of the gift. HMRC will assess the property to see its current value in comparison to its price when you brought it and then apply CGT on any profit. This will be charged at 18% or 28% depending on what category of taxpayer you are.

Should the property have seen a gain of £12,300 or less, no CGT is paid. CGT may also be paid once the property is sold.

We have a complete guide on Capital Gains Tax and inherited property that gives you all the answers to questions about how it works.

Stamp duty

If the property has been gifted to your children with no money having to exchange hands, there will be no stamp duty on inherited property required. Should there be a mortgage or other finance attached to the gift though, there is likely to be a form of stamp duty to be paid. This can be confusing so it is advised to seek the guidance of a solicitor before gifting a property to your children in case the tax due is higher than expected. Current stamp duty thresholds are set at £250,000 for residential properties and £150,000 for non-residential.

Can I gift property with a mortgage?

It doesn’t come recommended to gift a property with an outstanding mortgage. If you are looking to keep the same mortgage in place, you will need to speak to your lender who will then assess whether your child can afford to pay it back. They will consider it like any other mortgage application and could even reject it and state that they are not eligible for that mortgage or any other.

Should you still have a mortgage on a property and want to gift it, the lender will request you to pay off the outstanding balance before any change of ownership takes place.

Is gifting property to my children risky?

As with anything involving finance and property, there can be risks involved. Sometimes, these are nothing too worrying. Other times they can leave you in a tricky spot.

You should remember by gifting the property, you no longer own it and have no legal rights to it. For the most part, this should be fine as it was your intention all along. However, it can make your position slightly more vulnerable especially if you are still likely to be living in the property.

Should your situation become a little complicated, your home may have been the only asset of any real value that could have assisted you in raising vital funds. With that ownership now gone, you may find unexpected expenses much harder to cover.

It is also worth noting that once a property is gifted, it cannot be switched. A deed of gift is legally binding.

You may also find yourself in a perilous situation through the poor money management of your children. If you are living in the home but the children you have gifted it to find themselves facing bankruptcy, you could find that you lose the home.

They may also wish to sell an inherited property, which, of course, they have the right to. This could leave you in an uncertain position.

Finally, if there is evidence that you have gifted the home specifically to avoid care home fees, you could find that the value of the property is included in any needs assessment.

 Alternatives to gifting property to my children

You have seen that there are advantages to gifting property to your children. Not only will it help keep the level of Inheritance Tax lower but it will also provide them with a home for their own family or a piece of real estate that they can sell and help secure a better future for themselves with.

There are other options though that can help see the Inheritance Tax reduced.

Sell the house and give the cash to your children

If you sell the house rather than transfer it to your children, it may work out a little more simply than gifting it to them and having them sell it. Money earned from this would still be liable for the tax if you passed away within seven years of giving the proceeds of the sale as a gift.

Transfer of equity

A transfer or equity allows one or more of the original homeowners to remain on the title deeds with one or more of the children also being added as co-owners.

In most cases, this is done when there is still a mortgage on the property.

You will need to contact your lender in advance and provide a guarantee that the mortgage will still be paid once the child is added.

Transaction under value

You can always sell your home to your child for less than its market value making it much more affordable for them to get a foot on the property ladder. This can seem appealing but they could find that should they wish to sell the property at a later date, the level of Capital Gains Tax is way higher than normal. This is due to the price of the house being vastly different to the reduced price paid for it when obtaining it from the parent. So gifting property can be beneficial to your children, but it also comes with a few difficulties. Perhaps you would prefer a quick hassle-free sale so you can pass cash on to your children directly? If so, speak to us at Gaffsy. Our team are the industry experts at guaranteeing a quick house sale. Operating as cash house buyers, we can have an offer with you in no time at all and should you accept, funds can be in your account within seven days!

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