Some homeowners decide to transfer some or all of the ownership of their property to other people – often their children. There are a number of reasons why they choose to do this, but it is a decision that should be carefully considered before actually doing it as it can have consequences for you, especially if you are living in the property.
Deciding to gift property to children
One of the most common forms of property ownership transfer is to gift a property to your children. This is a relatively common way to minimise the impact of inheritance tax. It is important to remember that there can be financial and other consequences to gifting property to your children, however.
If you decide to gift your whole property to your children, this is known as ‘Transfer by Way of Gift’ or ‘Deed Of Gift’. In the UK, inheritance tax starts at 40% and is applied to anything that is over £325,000 – including property. If you have children and own your own property, you can claim up to an additional £175,000, so it could be that inheritance tax is payable at 40% above £500,000 but there are specific rules in relation to this.
This means that the amount of inheritance tax that you have to pay can be greatly reduced if you gift your home to your children. You should be aware, however, that if you die within seven years of gifting your property to your children, inheritance tax will still need to be paid – although the amount that must be paid begins to decrease after three years, if you gift more than the nil rate band of £325,000.
However, there are rules known as a gift with a reservation of benefit rules (GROB) when you continue to live in a property and retain a benefit. In these circumstances, the value of the property would not come out of your estate for inheritance tax purposes, unless you paid full market rent and this was regularly reviewed to ensure that it was current market rent. These are complicated rules and specialist tax advice should be taken.
In addition, there are substantial risks to transferring your property to your children or others while continuing to live there, particularly if the purpose is to minimise your assets so that you pay less or no care home fees. In those circumstances, the Local Authority could consider that by transferring the property, this is a deliberate deprivation of your assets and as such, they have the power to continue to take into account the value of the property when assessing how much care fees are paid by you.
What is transfer of equity?
Transfer of equity is a common way to divide a property between two people or more. It means that some of the property is transferred to someone else.
Some examples of transfer of equity include if a partner’s name is put onto the deeds of a property, giving them a share of a house when they are newly married. Another example could be when a couple who co-own a property separates.
For families who are concerned about paying a high amount of inheritance tax, this transfer of equity is a good way to help to reduce this but specialist advice should be taken.
Financial considerations when transferring equity
If you decide that you want to transfer some of the equity on your property to another person, there are, however, some financial considerations that you should think about before going ahead.
- The person who is receiving the equity may have to pay Stamp Duty Land Tax (SDLT) on the equity that they are receiving.
- The person who is giving the equity away may have to pay Capital Gains Tax (CGT) on the transaction.
- There are inheritance tax implications of doing this.
Although the rules are slightly different during COVID times, the general rule relating to stamp duty is that if the equity and a mortgage are over £125,000, stamp duty must be paid, although this does not apply if the equity transfer has happened as a result of a separation of a divorce or civil partnership.
If, however, you are transferring the equity as a result of a divorce or separation, you may need to pay Capital Gains Tax – depending on whether you have lived together in the most recent tax year.
Sharing equity of your home
If you are considering sharing the equity in your house, two kinds of shared ownership are available for you – joint tenants and tenants in common.
- Joint tenants – Joint tenants hold half of the property each. This is a common arrangement between couples, each holding 50% of the house and if one of them dies, the other person’s half goes directly to them. This arrangement cannot be overridden in your will.
- Tenants in common – Tenants in common refers to an arrangement whereby each tenant can have different percentage shares in the property. In this case, when one person dies, the other part of the property does not directly go to the other person, it will go to whoever you decide to leave it to in your will.
Holding in trust
When it comes to equity transfer in property, trusts can be used to allow you to transfer to children under the age of 18. In the UK, it is not possible for people under 18 to hold property, but the equity can be put into a trust which can then make it available to them when they turn 18 years old.
In this case, it does not matter if the person is related to you or not.
You will need a solicitor to process this for you.
Risks of giving property to a child
The main risk that comes with gifting a property to a child is that you are essentially handing control of your living circumstances to them – if you are going to continue to live in the property. This means that if they are unable to afford the mortgage repayments, or were made bankrupt, for example, you could end up without somewhere to live.
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Last reviewed on 11/07/23 by Abigail Gray who is an Associate Solicitor