Tony Granger considers various taxes that may be payable when transferring an interest in the family home to family members.
This article looks at the position where an adult child (e.g. son) comes to live with their parents, and part of the family home is gifted to them. A chilling thought for many!
Assume the family home in London is jointly owned by elderly parents and is valued at £750,000. There are no loans or mortgages on the home.
The house is their principal private residence and on the death of either one, the property currently passes to the other automatically.
Gifting part of the home
1. Inheritance tax
Part of the home is gifted and parents and son live there. The gifted interest in the home qualifies as a potentially exempt transfer for inheritance tax (IHT) purposes and thus, in principle, falls outside of the donor’s estate so long as the donor survives for seven years.
Even though the parents continue to occupy the home the gift should not normally be treated as a ‘gift with reservation’ (see below), in which case the gifted share does not form part of the parents’ estate on death (and hence no IHT is charged on that share).
In practice, a gift of 100% of the home is not acceptable to HMRC, but a gift of no more than 50% appears acceptable; thus, parents would retain 50% and their son would also own 50%.
It is important that the parents do not receive any benefit associated with the gift from the child who owns the 50%; otherwise, the ‘gifts with reservation’ anti-avoidance provisions may apply (and no IHT saving is achieved).
To prevent the parents from receiving any benefit from the son, the running expenses of the property (e.g. heating, lighting, etc.) should be paid by both donor and donee reﬂecting their respective usage (not reﬂecting their respective ownership percentages).
However, the parents could continue to pay all the running expenses of the property; this will also reduce their estate for IHT purposes on death whilst at the same time benefitting the child (FA 1986, s 102B(4)). This type of arrangement also excludes a ‘pre-owned assets’ income tax charge (FA 2004, Sch 15 para 11(5)(c)).
2. Stamp duty land tax
If the transfer is a gift and there’s no consideration, stamp duty land tax doesn’t normally apply.
3. Capital gains tax
Giving a property away is a disposal for capital gains tax (CGT) purposes. CGT is due only on a property that hasn't been a main residence for the whole time you've owned it. There will, therefore, be no CGT on the gift because part of the main private residence is being gifted. The son is, therefore, deemed to acquire the property (or an interest in it) at its market value at the date of gift. His CGT base cost would remain the value of the property share at the date of the gift to him.
(a) Passing by will
The son could still live in the house, which passes by will(s) to him.
Where a house is left to a lineal descendant, the residence nil rate band (RNRB) addition (£125,000 for 2018/19) potentially applies for each parent for IHT purposes.
There would be no CGT or SDLT payable. No IHT would be payable either in the above example, due to a combination of the normal nil rate band allowance (£325,000 for 2018/19) and residence nil rate band.
(b) Passing by will trust
The property could pass by will trust. For example, the RNRB could still remain intact (due to the IHT rules in IHTA 1984, s 144) if the trustees exercise the power in a discretionary will trust to choose a lineal descendant to inherit the property within two years of death.
Consider your planning options, whether by gift or by will or trust. Correctly setting up your strategy could save you tax.
This article was first printed in Tax Insider in June 2018.