Before income and estate tax laws were brought into effect, most children would simply move into their family home after their parent’s demise. It is not as simple anymore.
There are several legal ways in which you give your house to your children, and some of these ways allow you to do it tax-free. However, if you want to avoid paying extra taxes, you’ll have to plan.
Before learning more about creating a trust or reducing IHT taxes, let’s quickly know a bit about the taxes you might have to pay:
Stamp Duty Land Tax or SDLT – you’ll have to pay this tax depending on the amount you’ve received from your child.
Capital Gains Tax or CGT – you’ll have to pay this tax calculated on the market value after deducting purchase value.
Inheritance Tax or IHT – you’ll have to pay this tax that’s brought back into the estate if the donor dies within seven years of making the gift.
The buy-to-let properties are initially transferred to a trust and then back to your adult children. It is primarily done:
If you don’t want to pay Capital Gains Tax and like to avoid Inheritance Tax, you should transfer your estate properties to your children. Usually, you would be liable to pay CGT when you transfer a BLT property to your children. Capital gains are computed on the market value of the property, minus purchase price and refurbishment costs. HMRC assumes that the property’s market value was obtained by the parent – even though the parent gave away the property for free.
Parents would like to help their children get ahead on the property ladder, but the mortgage interest relief cap of Section 24 has hugely impacted the taxes of parents.
There are several benefits to gifting BTL properties to children. Some of the advantages are:
Please note that you don’t have to transfer or gift the property only to your children. You can gift the property to any loved one or family members.
Another point you should note is that the transfer of property using trusts will only work in your favor if you transfer the assets to an adult child. If parents transfer the assets to a minor, they will still be considered a part of their estate. And, any income generated from the asset will be considered as an income for the parent.
It is possible to reduce the overall Capital Gains Tax and the Inheritance Tax by putting the property into a trust. However, if you are gifting your house – the house you live in - to your children, you won’t incur Capital Gains Tax.
Capital Gains Tax is only applicable when you gain some taxable benefits from the property. Additionally, you also don’t have to worry about paying Inheritance Tax if you gift your property to your children – provided you live for at least seven years after gifting.
It is a step-by-step guide to help you transfer property to your children without incurring CGT and IHT.
You have to convert the buy-to-let property into a legal structure so that you can avoid paying massive Capital Gains Tax and incurring IHT. The legal system that deals with this is Section 260 of the TCGA.
The tax calculations are complex. Always make sure you get legal assistance from a qualified solicitor who knows the workings of property transactions. A tax specialist with experience in handling property accounts will be most helpful to you.
You have to wait a minimum of 3 months before transferring the property from the trust to your child or other family members. To create trust, make sure you seek help from experienced solicitors.
It would help if you wait for at least three months after transferring the property into the trust to hand over the asset back to your child. Once you have moved the assets to your child, you also have to consider exit charges.
The PET - Potentially Exempt Transfer - means that the person transferring the property to another family member would still have to pay IHT if they die within seven years of the original transfer. The PET is completely exempted if the donor survives 7 years after the original transfer. On the donor's death within 7 years of the initial property transfer, an Inheritance Tax will be levied on the gift recipient.
It is essential to seek help from a qualified solicitor or taxation specialist if you wish to gift your property to your children or other loved ones without having to pay IHT or Capital Gains Tax. The laws can get complicated, and it is vital to have all the information needed before making a decision.