If you are thinking about leaving property to a loved one, whether as a gift in the future or something you’ll make provision for in your will, it’s important to understand tax implications.
As part of your estate plan, it helps to consider efficient inheritance tax planning, to ensure asset protection where possible. In this guide, we detail the different options for gifting property that you may wish to consider, as well as the inheritance tax implications for each.
A reminder for those who may not be certain: Inheritance Tax (IHT) is a tax on the possessions of someone who has died, including money, property and other valuable assets. Normally your estate will have an inheritance tax allowance on your assets up to the value of £325,000; anything over this amount is taxed at 40%
Generally speaking, gifts are exempt from Inheritance Tax if the person gifting them survives 7 years after doing so, however there are certain circumstances where this is not the case.
Gifting a home before you die
If you give property away to a loved one, move out of the property and live for 7 or more years beyond the date of passing it on, there is usually no inheritance tax to pay.
Should you decide to hand over the ownership but continue to live in the house, you will have to continue to pay your share of the bills, and reasonable rent to whoever now owns it. You must then live there for at least 7 years.
You should consider several other factors when deciding if to give your home away. If you pass it onto a family member, you will no longer have any control over it and if that family member goes bankrupt, becomes divorced or decides to sell it, you will lose your home.
If you only give away part of the property, and the new owners also live there, you may still be able to claim exemption.
‘Gift with reservation’
Failure to adhere to the above rules will mean that the property becomes classed as a gift with reservation; it isn’t an outright gift and you are retaining an interest in it, therefore is not exempt from inheritance tax.
If you pay rent at the going rate for 7+ years, it may qualify for inheritance tax exemption. On the contrary, if the rent is not paid at all or is minimal, it would be deemed that the person was still benefitting from the property. As such, it would be taxed as normal upon their death.
Informed decision making and clarity on the specific rules is key to ensuring your estate is tax efficient both during life and beyond. An experienced estate planning solicitor will be able to guide you through all of this.
Passing on a property when you die
If you are married or in a civil partnership, when you die, your spouse or civil partner can inherit the property without having to pay inheritance tax. We would recommend making a will and getting professional advice to ensure this passes correctly and the full allowances are utilized.
If you are unmarried or widowed, or simply want to gift the property to someone else upon death, you must ensure that it is included in your Will. The property will be included in the valuation of your estate.
There are circumstances in which your inheritance tax-free threshold can be increased from £325,000 to £500,000, granted you either own the home or part of it. For this to apply, your estate must be worth less than £2 million.
If you choose to pass the property on to children or grandchildren, the £500k threshold can apply. This includes stepchildren, adopted children and foster children, if you so wish; you must be clear on the beneficiaries when writing your will, and no trust must be created.
The 7 Year Rule
It is worth noting, as touched upon earlier, that gifts given less than 7 years before death may be included in your estate for IHT purposes and may be subject to IHT, depending on the value. Whether or not this rule applies can depend on a few factors, including who you are gifting to and their relation to you, as well as the value of it. If the rule does apply, the property will be treated as a gift.
While unfortunately, we cannot see 7 years into the future, we advise forward planning and preparation with the help of an expert estate planning solicitor.
Estate & Inheritance Tax Planning
There isn’t often a one-size-fits-all approach to planning for our futures. Families come in all shapes and sizes, each with their own story and wishes.
Appoint an estate planning specialist who can understand your wishes on gifting property, the legacy you want to leave for your loved ones, and ensure that the preparations are put into place correctly.
Reach out to our estate planning team using our contact form, or give us a call on 0161 969 3131 and they will be happy to arrange a meeting with you.