Passing on your property to your children is a significant decision with legal, financial and tax implications. In this guide, we'll explore how you can gift your house to your children, the entire process, and the pros and cons. Let's get started!
Can I gift a house to my child?
Yes, you can gift a house to your child in the UK. However, it's a fairly complicated transaction. You need to carefully consider the tax implications and potential inheritance disputes. If you do decide to gift your whole property, this is known as ‘Transfer by Way of Gift’ or ‘Deed Of Gift’.
What are the tax implications?
When gifting property to a child, several taxes might apply. These include inheritance tax, capital gains tax, income tax, and stamp duty land tax. In general, most people see the main benefit of gifting property to be that you can minimise the amount of inheritance tax you're liable to. But let's get into it in more detail - or fo more information, check out our full guide to the tax implications of gifting property.
Inheritance tax explained
Inheritance Tax (IHT) is a tax applied to the value of your estate when you pass away. Gifting property can help reduce IHT, but timing is crucial. Under the seven-year rule, if you gift property and pass away within seven years, the gift may still be subject to IHT. However, if you live for more than seven years after making the gift, the property is usually exempt from IHT.
💡Editor's insight: "In the UK, our inheritance tax starts at 40% and can be applied to anything over £325,000."
Capital gains tax explained
Capital gains tax (CGT) is where you sell or 'dispose' of something that's increased in value. If you gift your main home to your child, there shouldn't be any capital gains tax to pay. However, it will still apply if you try to gift a second home or buy-to-let property. The tax is calculated based on the increase in the property’s value from the time you acquired it to when you gift it. Theoretically, if a property is bought and gifted immediately to your child, there should be no increase in value between the dates of purchase and gift.
💡Editor's insight: "In the UK, the first £3,000 of gain is tax-free under the CGT annual exemption (provided it has not already been used). This used to be £12,300 but was changed during 2022/23 - you can see more in Gov.UK's guide to CGT limits."
Income tax explained
Income tax typically doesn’t apply to the act of gifting a property. However, there may be indirect implications if the property generates rental income that continues to benefit you after the transfer.
Stamp duty land tax explained
Stamp duty land tax (SDLT) applies if the property is transferred with a mortgage, as your child would be assuming the mortgage debt. If the value of the assumed debt exceeds the SDLT threshold, tax is payable. The SDLT rates vary, though recently, properties up to £250,000 have been exempt from SDLT - get the most recent guidance from Gov.UK's guide to residential property rates.
💡Editor's insight: "Think carefully about stamp duty. If a property is being purchased solely to gift to children, then there's a chance of being charged SDLT twice. The first time when you purchase the property and a second as part of the gift if the mortgage isn't paid."
Pros and cons of gifting property to your children
Gifting a house to a child is a huge gesture. Before you commit to the transaction, be sure to weigh up the pros and cons. It could also be worth getting advice from an expert equity transfer solicitor in the process. Our best advice is to think of every possible situation and how you might handle it as a family.
Pros ✅ | Cons ❌ |
|---|---|
Gifting property can reduce inheritance tax liabilities | Potential capital gains tax and stamp duty may make gifting costly |
You can see your children benefit from the property while you’re alive | It's permanent - once transferred, you no longer have control or ownership of the property |
Gifting the property bypasses the probate process, making it easier to transfer property to your child | You only reduce inheritance tax under the 'seven-year rule' |
Is it better to gift or inherit a property?
Whether gifting or inheriting a property is better depends on your circumstances. Gifting can be great for inheritance tax planning if done well in advance. However, inheriting a property means no capital gains tax is payable, as the property’s value resets upon the owner's death.
What is the legal process to gift a property to a child?
The process of gifting a property can be unique to your situation. A property solicitor can guide you through the full process. Typically, you might expect the following steps:
Valuing the property: Obtain an accurate valuation to determine tax implications.
Informing your mortgage lender: If the property has a mortgage, you need lender approval to transfer ownership.
Hiring a solicitor: A solicitor will draft the transfer deed and handle the legal paperwork.
Updating the Land Registry: The solicitor will register the property in your child’s name.
FAQs
Can I give my child a buy-to-let home?
Yes, you can gift a buy-to-let property, but capital gains tax will likely apply. Additionally, if the property is mortgaged, stamp duty may also need to be paid.
Can I legally give my house to my children?
Yes, gifting your house is entirely legal. The process involves transferring ownership through the Land Registry and ensuring any associated taxes are managed.
What is the seven-year rule for gifting property?
The seven-year rule states that gifts made more than seven years before the giver's death are exempt from inheritance tax. Gifts made within this period are subject to a sliding scale of tax liability.
What is the most tax-efficient way to leave a home to a child?
Leaving a home in your will can be tax-efficient if it qualifies for the residence nil-rate band allowance. Gifting early while taking advantage of the seven-year rule can also reduce inheritance tax.
Can you gift a property with a mortgage?
Yes, but you must inform your mortgage lender, as the child receiving the property must either take over the mortgage or pay it off. Stamp duty land tax may also apply to the value of the mortgage being transferred.
Can a child own a property?
Children under 18 cannot legally own real estate. A common arrangement is for the property to be held in a trust on behalf of the child until they turn 18.
Can I gift a property to my child and still live in it?
Yes, you can stay in a property after you've gifted it to your children. But there are a few restrictions. You'll need to pay rent at the same rate as similar local rental properties along with bills. If you stay there rent-free, you will lose your inheritance tax exemption.
Final thoughts
Gifting a property to your children is a generous act that requires careful consideration of the financial and legal implications. By understanding the tax liabilities and seeking professional advice, you can ensure the process benefits both you and your children. If you're looking to explore gifting property, get a free quote today and see how our property solicitors can help.
References
Rules on giving gifts from Gov.UK
Disclaimer: This article only provides general information and does not constitute professional advice. For any specific questions, consult a qualified solicitor. Bear in mind that tax rules can change and will differ based on your circumstances.