Transferring a property to a loved one as a gift may seem like a simple, generous act — but when it comes to UK tax law, things can get complicated quickly. Before you sign anything, it’s crucial to understand the tax implications that could arise from this type of transaction. Here’s what you need to watch out for:
1. Capital Gains Tax (CGT) – It’s Not Always Avoided
Many people assume that gifting property means there’s no tax to pay, but that’s not necessarily true. If you gift a property that isn’t your primary residence (for example, a buy-to-let or second home), you may be liable for Capital Gains Tax. HMRC treats the gift as if you sold the property at market value, meaning any gain in value since you bought it could be taxed.
Tip: If it’s your main home, you may qualify for Private Residence Relief, which can exempt you from CGT.
2. Inheritance Tax (IHT) – The Seven-Year Rule
Gifting property doesn’t automatically keep it out of your estate for inheritance tax purposes. The gift is classified as a Potentially Exempt Transfer (PET). This means:
• If you survive for seven years after the gift, it’s free from inheritance tax.
• If you pass away within seven years, the gift may be subject to inheritance tax at up to 40%, depending on the total value of your estate.
Tip: Make a record of when the gift was made, as this is crucial for IHT calculations.
3. The “Gift with Reservation” Rule
If you gift your property but continue to benefit from it, for example, by living there rent-free, HMRC could still treat it as part of your estate for inheritance tax purposes. This is known as a Gift with Reservation of Benefit (GROB), and it defeats the purpose of gifting it for tax planning.
Tip: If you plan to remain in the property, you may need to pay market rent to the new owner to avoid this rule.
4. Stamp Duty Land Tax (SDLT) – Don’t Forget the Mortgage
If the property you’re gifting has an outstanding mortgage and the recipient takes on the debt, they may need to pay Stamp Duty Land Tax on the value of the mortgage. Even if no money changes hands, SDLT can apply because HMRC treats the assumption of the mortgage as consideration.
Tip: Always check the mortgage status and speak to a solicitor about potential SDLT liabilities.
5. Income Tax – If the Property Generates Income
If the gifted property is rented out, the new owner will need to declare the rental income and may have to pay Income Tax on the earnings. This is often overlooked but is important to factor into long-term planning.
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Final Thoughts
Gifting property can be a smart estate planning move, but only if you understand the tax implications. By planning ahead and working with experts, you can avoid unexpected bills and ensure your generous gift is protected.
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