Gifting assets to family and friends: not just for Christmas

It’s a time of year when we all think about gifts, but when clients consider making gifts of property to family and friends, there are a number of important complications to consider. For private client solicitors, one of our most important and impactful practice areas all year-round is advising our clients on gifts to their family and friends.

Gifting at Christmas, for birthdays or other celebrations is traditional, cultural, or just a part of human kindness and generally we don’t think about tax. Indeed, many people will make gifts of property, investments or other assets without taking advice from a solicitor, but this can lead to unintended consequences. Gifts of property in particular carry a number of tax implications and for solicitors, advising clients on gifts of property their advice can make a substantial difference to their and the recipients financial affairs.

Some key insights when planning considerations for clients making gifts to family and friends are:

·        While gifts of property to family and friends are often made at a substantial undervalue, this does not mean capital gains tax (CGT) will not apply, as this is calculated using the market value.

·        Gifts of property, such as the family home, to children by clients who remain living in the property will result in those gifts being retained in the donor’s estate for inheritance tax purposes, unless rent is paid at the full market rate.

·        Clients may need to pay Stamp Duty Land Tax (SDLT) if the gift includes taking on liability for a mortgage.

·        There is no guaranteed way to remove property from means tested benefits for future care costs and advice for clients on their objectives needs to be carefully considered.

To best tailor your advice, it is important to explore why a client wishes to make a gift of property to make sure the gift will achieve their objectives or whether another method may be preferable. Of paramount importance in these cases is a solicitor’s duty to ensure clients are not making gifts of property under undue influence and they are satisfied the client is acting under their own free will. Careful notes of the rationale behind any gifts should therefore be made. If the client does wish to proceed with a gift of property, particularly with the objective of tax planning, there are a few areas of complexity which should be kept in mind regarding capital gains tax, inheritance tax, income tax and SDLT.

Undervalued gifts and CGT

Often when property is gifted, for example to children or another close family member, the ‘purchase price’ of the property is zero. A gift of property is considered a disposal for CGT purposes (unless there is an exemption, such as principal private residence relief) but a zero or negligible purchase price (a sale for less than full consideration) does not mean no CGT arises.

For the calculation of CGT, the market value of the gifted property is applied, with CGT determined as usual on the increase in value, less any costs or fees, between the date of acquisition and the date of the gift. When your client wishes to make a gift of property to a close family member, you must therefore advise on the benefits and risks of doing so. Essentially, a sale for less than full consideration results in the undervalue being a gift. Note the purchase of an investment property and immediate gift would not result in a capital gain.