Gifting assets to family and friends: not just for Christmas

Alice Johnson presents some key points when advising your clients on gifting property

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.

Gifts and inheritance tax

Any gift of property made during a client’s lifetime can potentially attract inheritance tax if the donor does not survive seven years from the date of the gift. Gifts within seven years are considered part of the estate for inheritance tax purposes. A tapering rate applies if the gift is made at least three years before death. If making a gift is a clients’ objective, making these gifts as early as possible represents sensible planning, as long as the donor is confident they will not later need that asset.

Often, clients wish to gift their property in order to avoid future inheritance tax but remain living there. These circumstances are subject to a specific set of rules. If the gift of property through a sale for less than full consideration results in your client, the donor, remaining living in the property, this can be considered a gift of the whole property with reservation of benefit (GROB).

The gift here would be retained as part of the donor’s estate for inheritance tax purposes, although there are provisions for relief to avoid the same gift being taxed twice. If the donor pays rent to the recipient at the market rate, this can remove the gift from their estate, assuming sufficient time passes between the gift and death.

Where rental income is involved, either through the above arrangement or the gift of a rental property which attracts income, the income tax position of the recipient should be considered, noting net annual income for children under 18 exceeding £100 is taxed on the parents as if they retained ownership of the property.

In these cases, it is crucial to advise your clients carefully regardless of the circumstances now, a gift of a property to adult children results in handing over full control of the asset, for example the family home, which may carry risks in the event of longer-term changes in circumstances such as divorce.

Mortgage and SDLT

Whether the property attracts SDLT depends on whether there is a mortgage on the property. Gifting property with an outstanding mortgage will mean SDLT needs to be paid if the value of the mortgage is over the SDLT threshold. For tax purposes this is a ‘chargeable consideration’. Note, gifts of property to children under the age of 18, as they are not legally able to own property in their own name, will mean the property would be held under a trust structure, often a ‘bare trust’.

Family and future care

Thinking differently, for many clients the objective of gifting property to their close family is not to reduce their tax liability but to reduce their exposure to future care costs. Planning of this kind requires careful consideration and a detailed assessment of the clients wishes and objectives is recommended. There are, however, key regulations to consider. The current law regarding anti-avoidance measures allows some gifts to be ignored by local authorities and these measures are subject to change and can be applied retrospectively. There is no way of guaranteeing the value of gifted property will be discounted from means testing for care funding and clients should be made aware of this.

In summary, gifts can be a lot more complex than those left under the tree at Christmas. Although a useful tool to be considered in tax planning or for effectively transferring wealth between generations, gifting property to family or friends carries a number of potential pitfalls. If your clients are considering making gifts, careful advice should be sought from a private client solicitor, to take into account the client’s objectives and the full range of potential tax implications.

Alice Johnson is an associate at Druces druces.com