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Property investors who want to help their children by gifting them a home can face a tax and financial nightmare.
One of the big worries is what happens to the home if the child has a failed relationship.
Several factors need considering:
Capital gains tax
Although transfer between husbands and wives who live together are CGT exempt, transfers to other members of the family are not. Gifting a property is one of the triggers for the tax – paid at 18% on the gross gain if you are a basic rate taxpayer (20%) or 28% for higher rate taxpayers (40%).
CGT rules say transfers within the family are treated as a open-market value transactions regardless of the value agreed by the giver and receiver.
If the value of the property exceeds stamp duty thresholds, then the person receiving the gift has to pay this tax if the property has a mortgage of £125,000 or more.
The gift is likely to be a ‘potentially exempt transfer’ or ‘PET’ that means no IHT is due providing the person making the gift lives seven years from the date the property was handed over.
If the giver dies before the seven years are up, IHT is paid at a discount rate depending on the number of years since the gift.
One of the problems is transferring homes that generate rental income. Often the giver wants to retain the income while transferring control of the asset.
This undermines any tax planning because a genuine gift is unconditional and the person making the gift must give up any benefit from the property.
That means any rents go to the new owner, who has to account for them to the taxman.
Gifts in trust
Putting the property in to trust can help protect the gift if a child has a broken relationship, but this can still involve possible CGT and IHT liabilities.
If a property with a mortgage is transferred, you need to talk to the lender about the transfer of title.
Take professional advice if you are considering handing over a home to your children – and remember that the same rules apply to other valuable possessions, like art, antiques, jewellery and cash as well.
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