Should I Transfer Ownership of my Property to My Children?
Transferring ownership of your property to your children can be an effective strategy to reduce Inheritance Tax (IHT), but it comes with legal, financial, and personal risks that must be carefully considered.
Process
The most common way of transferring a property to your child is by gifting it through processes known as either a transfer of whole or a transfer of equity. A transfer of whole means giving your child both the legal and beneficial ownership, whereas a transfer of equity involves only a partial share being transferred and requires at least one original owner to remain on the title.
Those under the age of 18 cannot hold legal title, but a beneficial interest can be held in trust for them until they turn 18, typically via a bare trust. In this arrangement, the child will hold a beneficial interest only, whereby they have a right to the property’s capital and income. Once they turn 18, they will have a right of full legal and beneficial ownership.
Factors to consider
Remaining in the Property – If you intend on living in the property after transferring ownership to your child or children, you will need to pay market rent to your child otherwise there may be IHT implications. Payment of market rent will demonstrate that you no longer benefit from the asset. However, you child will be liable for income tax on the rent.
There is also a personal risk; you could be evicted by your child or forced to leave if the property becomes subject to divorce or debt proceedings involving them.
Trusts - 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.
Tax implications - Transferring property ownership brings complex tax considerations, including:
- Stamp Duty Land Tax (SDLT): SDLT is not usually payable if the property is being transferred an outright gift. However, it may become payable if there is a mortgage involved, if any consideration is paid or if your child already owns another property.
- Capital Gains Tax (CGT): You may owe CGT based on the gain in property value since its purchase. The gain is calculated on the market value at the time of transfer versus the original purchase price.
- Inheritance Tax (IHT): If you gift the entire property and live more than seven years after the gift, the transfer may be IHT-free. If you pass away within seven years, tax is tapered depending on how many years have passed since the gift. The IHT threshold is £325,000 (potentially up to £1 million with reliefs), with tax charged at 40% above this limit.
It is strongly recommended that you obtain tax advice from a tax specialist to ensure you are aware of any potential liabilities.
While transferring your property to your children may reduce your family's tax burden, it involves giving up control and exposing yourself to potential risks. Legal and financial advice is essential to make an informed, secure decision.
Do you need a solicitor?
Given the legal complexities, using a solicitor is highly recommended. They will handle the Land Registry applications, draft legal documents (including declarations of trust), advise on the most suitable method of transfer, and ensure compliance with property laws. This reduces the risk of errors and protects your family's interests both now and in the future.
For further information on residential conveyancing please contact a member of the Residential Property team.
