Will we have to pay any tax if we gift a property to our Grandchildren?
We would like to know what the tax implications of the gift would be. Also, how do we go about gifting it to them?
Do we just need to tell the Land Registry? Will we have to pay stamp duty or any other charges?
"This is very generous of you. However, before doing this you need to be fully confident that you won’t need use of the property for yourselves in the future and that you understand the tax consequences.
As this isn’t your main residence, any transfer will potentially be subject to capital gains tax (CGT), based on the difference between the property’s purchase price and its market value when it is gifted to your grandchildren.
Depending on your circumstances you could end up paying CGT at either 18% or 28%. However, if you’re not using your CGT allowance elsewhere, you and your wife can both use your annual CGT allowance of £11,100 each.
This means that you can make combined gains of £22,200 before any tax becomes payable.
It might be possible to gift the property to your grandchildren over a number of years, so you can use your capital gains tax allowance in each of those years and so reduce your tax bill.
However, this isn’t entirely straightforward and could have an adverse effect from an inheritance tax (IHT) perspective.
When looking at IHT, if you gift the property this will be treated as a potentially exempt transfer. This means that the property will remain in your estate for the next seven years.
From year three onwards (assuming you are no longer benefiting from the property), the amount of the gift potentially liable to inheritance tax reduces until it becomes completely tax-free after seven years.
It is possible to gift a property to a trust and then for the trustees to appoint the property to the beneficiaries without there being any immediate capital gains tax liability.
However, this is a complex area which could lead to other tax charges and administration costs and isn’t something you should look at without taking independent financial or legal advice.
If you’re transferring the property to your grandchildren, they won’t have to pay stamp duty if there is no outstanding mortgage. If your grandchildren take over some or all of an existing mortgage, stamp duty would be due if the value of the mortgage is above the stamp duty threshold.
Something else you may need to be aware of is deliberate deprivation of assets. If you need to go into residential care, the local authority can carry out a financial assessment to determine the amount of funding you are entitled to. It can consider previously owned assets as well as those you currently own and so can include any property you give away in its calculations.
Whether it would or not is down to what it believes your intentions were. When you gifted the property, could you have reasonably known that you might need care?
As you can see, there is a lot to consider here. If you’re not sure of what your best course of action is, you should take independent financial or legal advice."
Patrick Connolly is a certified financial planner for Chase de Vere.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.