Transferring ownership of your property to your child (or children) could be a beneficial way of minimizing the impact of Inheritance Tax for your family, but it is not without risk. Residential Property solicitor, Nathan Dady, explains.
How to transfer ownership of a property to your child?
The most common way to transfer your property to your child is by gifting it, and this can be done by way of a transfer of whole or equity. A transfer of whole involves transferring both the legal and beneficial title to your child and a transfer of equity means that only a proportion of your property is being transferred to your child. When you are transferring a proportion, at least one of the original legal owners must remain as a registered proprietor.
Though minors (children under the age of 18) are not legally able to acquire or hold property in their name, they can hold a beneficial interest in property. The equity can be put in to a trust for them until they turn 18. You, as the trustee, will typically enter into a Declaration of Trust confirming the property is held on trust for your child “absolutely”. This is known as a “bare trust” where your child has an immediate and absolute right to both the capital and income of the trust. If there are two or more children, the older child is not entitled to the legal title when they turn 18, but instead must wait until the younger (or youngest) child turns 18.
What happens if a parent wishes to remain in occupation of the property after the transfer has been effected? Are there any risks involved?
There are risks associated with transferring ownership as you ultimately relinquish any rights you had to the property and these rights are instead vested in your child.
You can remain living in the property after ownership is transferred, however you must pay a fair market rent to your child otherwise inheritance tax will become due. Paying rent to your child makes it clear for inheritance tax purposes that you are no longer receiving the benefit of the property and cannot therefore be considered as still owning the property. It is also worth bearing in mind that your child will be liable for paying income tax on the rent.
If you wish to remain in occupation after the transfer has been effected, this has the potential to put you in a vulnerable position. You could lose your home if your child decides to evict you, for example, (and they will be within their legal right to do so). This could arise as a result of a family feud, or perhaps the property forms part of your child’s divorce proceedings and subsequently needs to be sold.
In a trust situation, ordinarily, you will not have discretion over the property being held in trust and you will act as a nominee in which the property is held. However, when a bare trust is created (whereby your child is under the age of 18), you will have active powers and duties to invest the property and to consider whether and how to use any capital or income to the benefit of your child.
What are the tax implications?
Unavoidably, the tax element can be quite complex as and consideration will need to be given to Income Tax (as previously mentioned), Stamp Duty Land Tax (SDLT) liability, Capital Gains Tax (CGT) and Inheritance Tax as well as the mechanism by which they apply.
Your child will have to pay SDLT on the share (whether that be the whole or part) of the property they receive which is valued at over the SDLT threshold (currently £250,000) in the usual way as if your child was to purchase the property at full market value. Additional higher rates may also apply if the transfer would result in your child owning more than one property.
CGT may also be payable as a result of a transfer. The tax basis is inherited from you (i.e. the price paid for the property at the time) and the ‘gain’ is the difference between the purchase price and the current market value. CGT is payable on the ‘gain’ (i.e. if the property was purchased five years ago for £250,000 and its current market value is £350,000, the gain would be £100,000).
If you decide to gift the whole of your property to your child, the amount of inheritance tax that your child will have to pay later down the line will be greatly reduced, and in certain circumstances be nil. Inheritance tax applies to all chargeable transfers valued at £325,000 or more (although there are specific rules that increase this to £1million). The initial tax rate starts at 40% on any amount over the £325,000. When a property is gifted, for every passing year from the third year up to the seventh year, the amount of inheritance tax is tapered. At the seventh year or thereafter, the transfer is a potentially exempt transfer and inheritance tax can be avoided.
Do you need a solicitor?
The process of transferring property involves amending or changing the title deeds. Your solicitor will be able to advise you on the options available, guide you through the applicable law, carefully consider the legal wording required in any documentation and complete the registration process at the Land Registry. As with most transactions there tends to be moving parts and several components to consider, and your solicitor will ultimately minimise the risk to you and your family now and in the future.