Will our kids pay additional stamp duty when they buy a home?

Lisa Vaughan
25 October 2016

Q

We own a second home mortgage- free and I am wondering if we should add our two adult children to the title deeds. It would mean we are effectively giving away half of the house as a way of reducing our potential inheritance tax liability.

I assume that, as it is a second home, there would be less concern about our continued right to live in the house, as all the family can use it when they want.

We haven’t owned the house very long and I don’t believe it has gone up much in value, so I don’t think capital gains tax (CGT) will be an issue. Would our children having a share of this property mean they would be liable to pay the new ‘second home’ rate of stamp duty when they come to buy their own homes?

From
MB/London

A

In normal circumstances such a gift would be classed as a potentially exempt transfer and becomes fully exempt from IHT provided you survive the date of the gift by seven years.

However, you could be caught by the ‘gift with reservation rules’, which are designed by HMRC to prevent anyone from passing on assets while retaining benefits from them.

So if you made the gift and still continued to be the main occupants of the property, you would have to pay rent to the children at a commercial rate. An alternative would be to work out how much the property is used by the different members of the family and for you to retain a share equal to your usage.

 

You could also be caught out by the ‘gift with reservation rules’ if you keep all of the rental income you might generate from the property, as this would have to be split with your children too.

It is also worth considering your children’s marital status. If you give them part of the property and, in the future, they divorce, their ex-spouses would have a claim on your holiday home. As you mention, there is a potential capital gains tax issue.

As this isn’t your main residence, CGT is due on any profit you make from selling it. But you have an annual CGT allowance of £11,100 and as you mention that the property has only been owned for a short period, I agree that it is unlikely that the property has increased sufficiently in value for a CGT charge to apply – particularly as two CGT allowances of £11,100 may be available to offset against any gain, as the property seems to be owned by both of you.

 

The big issue you have is that your children could be liable for the new ‘second home’ stamp duty levy. Since 1 April 2016, an additional 3% rate of stamp duty land tax applies to purchases of additional residential properties, such as second homes and buy-to-let properties.

If you gift a share in a property, this does not give rise to a stamp duty land tax charge. However, your children will become part- owners of your property. If they subsequently purchase a home for themselves, they may be liable for stamp duty land tax at the higher rate as this purchase could be considered to be a second property.

However, the additional stamp duty isn’t levied if you already own a primary residence, sell that property and buy another property to use as your primary residence within three years of the sale.

As you can see, this is an incredibly complicated tax, so I would recommend your children seek professional advice before you go ahead with your plan to gift them part of the house.