Giving the gift of property? Don’t get caught by the tax man

We’ve heard about plenty of incidents where parents have helped children get on the property ladder - but what about when children want to help grandparents downsize? Whilst many think they could be playing it safe, make sure the tax man doesn’t pounce.

In the Times a few weeks ago, we heard of 78 year old Kay Charlton who lived on her own, but after a lonely lockdown, her daughter decided it was time for her to move in with her and her children so that they could live all together. That way, it provided a bit more company for Kay and enabled her to spend more time with her grandchildren.

Kay wanted to sell her property and place the capital into a larger property that would be suitable for her, her daughter, son-in-law and their children as a three generational household. With the money left over, she also wanted to purchase a holiday home in the north of England, which she wanted to leave to her other child, a son, who lived elsewhere.

Whilst this is extremely generous of Kay, there are a few things she needs to consider first. For example, if Kay gifts her daughter her contribution towards her home, and her daughter is not named on the deeds, the gift will be caught under “gift with reservation” rules - so in the eyes of HMRC, Kay would still be reserving the right to benefit from the property and it will appear in her estate for inheritance tax (IHT) purposes. This is true even if Kay lives for a further seven years after making that gift.

Kay could, however, get around this by ensuring the gift is regarded as a “potentially exempt transfer”, which would then not be subject to IHT. This would involve her paying market rent at the new house she occupies with her daughter. Whilst this would need to be declared as taxable income, it would help convince the tax man that Kay wasn’t trying to make an under-the-radar gift.

Alternatively, Kay could name her daughter on the deeds, but Kay would need to leave her share of the property to her daughter in her will. The share would also qualify for the enhanced IHT rate, because it would be her primary residence - therefore, Kay’s daughter could pay less tax if Kay passes away. When a parent leaves their home to any direct descendant, the IHT benefit could be worth £175,000 in the 2020/21 tax year on top of the IHT-free threshold of £325,000 - so Kay could pass an overall allowance of £500,000 on to her daughter.

However, the fact that Kay wants to purchase a second home in the north of the country could see her stung for additional stamp duty, which is due for all second home purchases. Therefore, it is advisable she buys the higher value property first - and that Kay could benefit from paying less stamp duty on her primary home purchase, as the Chancellor has currently abolished Stamp Duty on main homes worth up to £500,000. 

Also, as is always advisable, Kay will need a will to outline wishes to both her son and her daughter and should make sure communications with them remain open at all times to ensure fairness - and that her wishes are carried out and respected in the event of her death. There are also potentially  other issues, for example how would Kay pay for any care she needs and if she was not well enough to stay living with her daughter and family?

If you would like some more information about a property purchase or would like some legal advice in relation to a will, contact Downs Solicitors to see how we can help.