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When gifting a property to a family member, it is essential to understand the inheritance tax (IHT) implications, particularly if the person gifting the property continues to occupy it. This article will discuss the general rules and potential exemptions under the UK’s HM Revenue and Customs (HMRC) guidance.
In the UK, if a person (X) gifts a property to another person (Y) and continues to live in that property without paying the new owner a market rent, it is considered a “gift with reservation of benefit” (GROB). In such cases, the property may still be considered part of the deceased’s (X’s) estate for IHT purposes. Therefore, if the property’s value exceeds the IHT threshold, it could be subject to inheritance tax. However, certain exemptions may apply, and understanding these can help navigate the potential tax implications:
- Exemption for infirm relative: HMRC allows an exemption where a family member lives with an infirm relative to look after them. For this exemption to apply, there must be a change in circumstances after the gift. If X has always occupied the property, this exemption likely will not apply. The situation would be different if X had gifted the property to Y, moved out, and later became ill and had to move back in with Y.
- Exemption for an undivided share in the property: HMRC provides another exemption where there is a gift of a share in the property, and both the giftor (X) and giftee (Y) bear their share of the running costs. However, this exemption requires a gift of an “undivided share in the property.” If the entire property was gifted to Y, each party bearing their running costs might not be relevant, and the exemption might not apply. In this case, the whole house could be included in the estate for IHT purposes.
It is important to note that tax rules and regulations are complicated and subject to change. The information provided in this article is broad. It is essential to contact our tax expert, who can give guidance tailored to your circumstances and ensure that you get the most accurate and up-to-date information for your situation.