A Tax-Efficient Approach – Gifting Your UK Property To Your Children

Person Putting Coin in a Piggy Bank

Transferring property to your children while you are still alive can be an effective way to avoid inheritance tax when you pass away. There are limits on how much you can gift tax-free each year, but with some planning, gifting property can significantly reduce the inheritance tax bill your children will face in the future.

The Benefits of Gifting Property

There are several key benefits to gifting property during your lifetime

Avoid Inheritance Tax

When you pass away, any estate valued over £325,000 is subject to inheritance tax at 40%. This threshold has been frozen until at least 2026. By gifting assets to your children during your lifetime, you can reduce the value of your estate and minimise the inheritance tax due.

Remove Value from Your Estate

Gifting property removes that value from your estate for inheritance tax purposes. Even if you live for 7 years after making the gift, it is not included in your estate.

Make Use of Annual Exemptions

You can gift up to £3,000 each tax year without the gifts being subject to inheritance tax. Gifting property allows you to make full use of this annual exemption.

Potentially Remove Capital Gains Tax

If your property has increased significantly in value, gifting it to your children can avoid capital gains tax if and when they eventually sell it.

Income Tax-free Rent

If you continue living in the property after gifting it, your children can earn up to £7,500 a year tax-free in rent. Above this amount, they pay income tax at their marginal rate.

The 7-Year Rule for Potentially Exempt Transfers

To fully avoid inheritance tax, you must survive for 7 years after gifting your property. These gifts are called “potentially exempt transfers”.

If you pass away within 7 years of the gift, inheritance tax may be due. The tax rate reduces on a sliding scale if you survive between 3 and 7 years – this is known as taper relief.

The value of the gift is frozen at the time it is made. Any subsequent growth in its value is outside of your estate.

Making a series of exempt transfers can significantly reduce potential inheritance tax. Spreading larger gifts over multiple tax years is one way to maximise the use of allowances.

How Much Can I Gift My Children Each Year?

When considering gifting property, it is important to understand the limits for tax-free gifts each tax year

  • Annual exemption – You can give away up to £3,000 worth of gifts each tax year exempt from inheritance tax. These gifts can be in cash or other assets.
  • Small gifts exemption – You can make small gifts of up to £250 to as many people as you like tax-free.
  • Wedding gifts – Gifts to children getting married have a tax-free allowance of £5,000 for each child. The same limit applies to grandchildren and great-grandchildren.
  • Gifts from income – If you can prove it does not affect your standard of living, unlimited gifts from your regular income are exempt.
  • Home to children – Gifting a home to your children or grandchildren allows you to continue living there rent-free.

As long as you survive 7 years after the gift, it falls outside your estate for inheritance tax purposes. Making use of all available exemptions each year allows you to pass significant assets to your children free of inheritance tax.

Options for Gifting Property

There are a few different options to consider when gifting property

Outright Gift

You can gift the entire property to your child immediately. However, this uses up your available nil-rate band for inheritance tax straight away. Making an outright gift also means giving up all rights to the property.

Gift with Reservation of Benefit

You can continue living in the property rent-free after gifting it. This allows you to gift the property but exclude its value from your estate as long as you survive 7 years. Make sure your children do not pay for related costs like property taxes or mortgage payments.

Joint Ownership

If you add children as joint owners of your property, HMRC will assume you gifted your share to them when you die unless evidence proves otherwise. The 7-year rule applies if you want the gift outside your estate.

Trustees

You can transfer a property to a trust with your children as beneficiaries. They gain access at a later date, allowing you to still live there. This avoids an immediate inheritance tax charge.

Which option you choose depends on your situation, intentions for the property, and relationship with your children. It is important to take professional legal and tax advice.

Steps for Gifting Property in the UK

If you decide to gift your home or investment property to your children, there are a few key steps

  • Get a valuation – Have the property valued by an independent surveyor to determine the value of the gift. This sets the baseline for taper relief.
  • Choose recipients – Decide which of your children or grandchildren to gift the property to. You can gift it jointly or to just one individual.
  • Determine the best method – Consider whether to gift the property directly or via a trust. A trust allows you to stipulate age limits and terms for your children to benefit.
  • Consult professionals – Talk to a solicitor to determine the legal implications. Also, discuss the tax impact with your accountant.
  • Draw up transfer deed – Transferring the property title requires a deed. A solicitor can help draw this up and register it with HM Land Registry.
  • Update your will – Review your will to reflect the gift and change in your assets. You may also need to update other estate planning.
  • Survive 7 years – To completely remove the gifted property from your estate, you must survive at least 7 years beyond the gift date.

Transferring property requires significant planning, but the inheritance tax benefits for your children in the future can be substantial.

What Inheritance Tax Is Due if You Don’t Survive 7 Years?

If you gift property and unfortunately pass away within 7 years, it may still be counted as part of your estate for inheritance tax purposes. The amount of tax due is reduced over the 7 years

  • Death within 3 years – Full 40% inheritance tax due
  • Death between 3 and 4 years – 32% inheritance tax due
  • Death between 4 and 5 years – 24% inheritance tax due
  • Death between 5 and 6 years – 16% inheritance tax due
  • Death between 6 and 7 years – 8% inheritance tax due

Once you survive 7 years beyond the gift date, there is no inheritance tax to pay, no matter the value. Making a gift also freezes the value so subsequent growth is outside your estate.

Taper relief significantly reduces the effective inheritance tax rate if you live for a few years after the gift but less than 7.

Even if some inheritance tax is due within 7 years, gifting property can still save your beneficiaries thousands of pounds compared to if the asset was still in your estate when you passed away.

What Are the Downsides of Gifting Property?

While gifting property can be highly tax-efficient, there are some downsides to consider

  • You lose access to the asset and cannot sell or mortgage the property in the future.
  • Capital gains tax may be due if you gift and your children later sell at a higher value.
  • It can create family disputes if children feel treated unequally in terms of gifts received.
  • You give up all rights to rental income or capital growth.
  • If you need care in the future, the gifted property’s value is not considered for means testing.
  • Your children immediately incur costs like repairs and property taxes.
  • If your children divorce, the gifted asset may be considered as part of divorce proceedings.
  • If your child already owns property, it can push them into higher stamp duty rate brackets.
  • If you die within 7 years, substantial inheritance tax could still be due.

Consider both the benefits and drawbacks. Consult professionals to structure gifts in a way that works for your situation and goals.

Alternatives to Lifetime Gifts

Gifting property is one tax planning strategy but there are some alternative approaches

Leave Property in Your Will

Leaving property in your will allows you to retain full control during your lifetime. If you bequeath it to direct descendants, inheritance tax is only due above the nil-rate band. You can also structure your estate so a surviving spouse inherits absolute ownership.

Give Away Only Part of the Property

You could choose to gift only a share of your property. This allows you to make use of annual allowances without giving up ownership entirely. When you pass, your share remains within your estate.

Leave Property in Trust

Putting your home or other property into a discretionary trust allows you to stipulate when and how your children receive benefits from the assets. This provides more control than gifting it directly.

Take Out Life Insurance

A life insurance policy payable to your children when you die provides them with a lump sum outside your estate to pay any inheritance tax bill. This avoids gifting property you might need to fund your retirement.

Use Allowable Gifts Within Limits

Maximising the use of gifts within annual allowances, small gifts exemption and gifts on marriages can steadily transfer value without giving away your property. Keep records to prove these gifts to HMRC.

Key Takeaways

Gifting property to your children during your lifetime can be an extremely tax-efficient approach with proper planning. Here are some key takeaways

  • Take advantage of allowances like the £3,000 annual exemption to gift assets each year.
  • Outright gifts remove the property from your estate after 7 years but give your children immediate rights.
  • With trust or reservation of benefit, you can gift while still living there.
  • Consider both benefits like inheritance tax reduction and drawbacks like loss of control.
  • Consult tax professionals to structure gifts most appropriately for your goals and situation.
  • Keep documentation of allowable gifts made each year to prove they are exempt when necessary.
  • Review your will, estate planning and potential for taper relief.
  • If gifting the full property is not right for you, consider alternative options like leaving only a share.

With professional advice and the right strategy, gifting UK property to your children can be extremely effective for inheritance tax mitigation. The key is ensuring the approach works with your overall financial situation and wishes.

In Summary

Gifting assets during your lifetime can reduce inheritance tax bills for your loved ones in the future. For gifted property, the 7-year rule means it falls outside your estate as long as you survive 7 years beyond the gift date.

If you pass away within 7 years, taper relief can still reduce inheritance tax compared to if the property was fully in your estate. Consider the pros and cons, take professional advice, and gift at a level you are comfortable with.

Make use of allowable exemptions each year but do not gift so much that you compromise your retirement funding. With the right strategy, gifting property to your children can be a prudent tax planning approach in the UK. If you are still wondering about the question, “How much can I gift my children?”, then this guide provides detailed advice to help you understand better.

We are proud members of...

  • NAPB
  • RICS
  • The Property Ombudsman
  • Trading Standards

We are proud to be the most regulated property buyer operating in the ‘Quick House Sale’ industry. We are an active member of the NAPB (National Association Of Property Buyers) and are RICS regulated, which means you can have every confidence of selling your home with us quickly & easily.