Gifting the Family Home: Potential Inheritance Tax Pitfalls for Daughters
Transferring property ownership to children can be a risky strategy that may still result in inheritance tax liabilities for both the parents and the recipients.
Transferring the family home to children as a gift can be a complex financial decision, potentially exposing both parents and their offspring to unexpected inheritance tax bills and other financial complications. Experts caution that such gifts are often risky and generally not advisable without careful consideration and professional advice.
When an individual gifts an asset, such as a home, to someone else during their lifetime, it is considered a Potentially Exempt Transfer (PET). For this gift to be excluded from the donor's estate for inheritance tax (IHT) purposes, the donor must live for at least seven years after the date of the gift. Crucially, the donor must not retain any 'reservation of benefit' from the gifted item. For a property, this means the donor cannot continue to live in the home as if they still owned it without formal arrangements.
Failure to meet these conditions can result in a Gift with Reservation of Benefit (GROB). In such cases, HM Revenue and Customs (HMRC) may deem the asset to still be part of the donor's estate for IHT calculations, even if legal ownership has passed to the recipient. This can lead to the asset being included in both the donor's estate (due to the failed PET) and the recipient's estate (as the legal owner).
To mitigate the risk of a GROB when gifting a home, specific steps must be taken. This includes establishing a formal tenancy agreement where the donor is the tenant and the recipients are landlords, with the donor paying market-rate rent consistently. This rent must be paid throughout the donor's occupancy, reviewed periodically, and the recipients must declare and pay income tax on this rent at their marginal rate. Furthermore, formal documentation like a Deed of Gift is necessary, and both parties should update their wills.
Even if a GROB is avoided, other tax implications can arise. The Pre-Owned Asset Tax (POAT) can be charged on assets that have been gifted but are still occupied by the donor. This tax is an annual charge based on the asset's value. If market rent payments cease at any point, it can re-trigger the GROB rules, restarting the seven-year clock from the date rent stopped.
Impact on Residence Nil Rate Band
The Residence Nil Rate Band (RNRB) allows individuals to pass on their main residence to direct descendants free of inheritance tax, up to an additional £175,000 per person. To qualify for the RNRB, the property must be included in the deceased's estate and be left to direct descendants. Properties in which the deceased never lived do not qualify for this allowance.
Exceptions and Considerations
There are limited circumstances where gifting a home might be more appropriate. For instance, if an individual lives with an adult child in a property solely owned by the parent, gifting a portion of the property to the child while continuing to pay at least 50% of the bills may be feasible. This could avoid Capital Gains Tax (CGT) due to private residence relief. However, a professional valuation and potentially a property life interest trust would be necessary.
Gifts made into trusts also face similar scrutiny. If rent is not charged for the donor's occupation, a GROB can apply, leading to potential inheritance tax charges at the time of transfer and every ten years thereafter. CGT implications can also arise when assets leave the trust.
Local authorities can also scrutinize gifted assets if an individual requires care and cannot fund it themselves. In such cases, gifted assets may be treated as if the individual still owns them, irrespective of any time limits.
Undoing a gift is also complicated. If ownership is transferred back to the original donor, it constitutes a PET from the recipient's estate. If the property is no longer the recipient's main residence, CGT may be payable on any increase in value since the original gift, and Stamp Duty Land Tax could also be applicable.
Given the complexities and potential risks, seeking advice from a solicitor experienced in estate planning is crucial before making any decisions regarding the gifting of property. This is particularly important when considering the original gift was made in 2012, and specific circumstances surrounding the payment of rent and the initial ownership structure between the couple need to be reviewed to determine current tax liabilities and the best course of action.