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Author: Tim Hughes
We are often approached by clients who say they are thinking of gifting their home, or other property, to their children or other family members to “save tax”.
However, the gift of a home or other property can involve more than one type of tax, and the following is a brief resumé of matters to be considered.
1. Inheritance Tax
Inheritance Tax can usually be avoided if property is gifted more than seven years before the date of death (in certain circumstances there are taper provisions if the gift is made more than three years before death).
While it may be tempting, therefore, to consider such gifts, there can be certain difficulties:
(1) A gift of your “home” is, normally, not exempt from IHT, even if the seven year period has elapsed, unless you have paid a full market rent for your occupation during that period. However, a gift of your home is normally exempt from Capital Gains Tax (CGT).
(2) A gift of any other property will usually be exempt from IHT after the seven year period has elapsed. Nevertheless, CGT may be an issue (see below).
While Inheritance Tax is a tax paid on death, Capital Gains Tax becomes payable in the year following a disposal.
2. Capital Gains Tax
Before you consider gifting property, consider whether CGT will be payable. CGT is payable, with the benefit of a minor annual allowance, currently £11,300, on the gain in value between the date of acquisition and the date of “disposal” (gift).
While there can be certain deductions, such as the cost of improvements to the property, and expenses on acquisition and disposal, the rate of CGT on such gifts is currently dependent on the donor’s income tax rate. Any gain above the allowance is taxed at 18% for a basic-rate taxpayer or 28% for a higher-rate taxpayer.
Before considering whether to make a gift, therefore, to save IHT, it would be sensible to ascertain the extent, if any, of any CGT which might be the inevitable consequence.
3. A Possible Solution - Trusts
CGT will become due when the property is sold, or eventually passed to the Beneficiaries, but this is not the responsibility of the original donor. The timing of the payment of CGT is, therefore, something which can be controlled.
Again, however, the advantages of a Discretionary Trust will or may depend on the value of the property given. An immediate charge of Inheritance Tax (at the rate of 20%) arises if the value transferred into the trust exceeds the value of the donor’s available IHT “Nil Rate Band” – usually, but not always, £325,000. However, see below, gifts to spouses are exempt.
4. Transfers Between Spouses
If you are considering making a gift of property, and are married, it may be worth considering transferring some or all of the property first to your spouse.
There are numerous permutations, and much will depend on the individual circumstances. Factors to consider are:
(i) For IHT purposes, which spouse is more likely to survive seven years?
(ii) For CGT purposes, a gift of a jointly owned property may allow the use of a double annual allowance, rather than one.
(iii) For Discretionary Trusts, a gift by both spouses can:-
(a) Help ‘double up’ the available value gifted, from £325,000 to £650,000, thereby possibly preventing the 20% lifetime IHT charge; and
(b) Help achieve the use of the double CGT annual allowance.
The above is by no means comprehensive, as every case is different. The law is both complicated and flexible so it is always advisable to seek specialist advice from a member of our Private Client Department.