Skip to content 
Throughout their lives, people often build up wealth, and it’s not uncommon for them to want to share some of these resources with their family members or donate to non-profit groups. Giving property or transferring assets are frequent ways to realize this intention. Nevertheless, being aware of the UK’s tax rules related to such transactions is crucial to avert any surprise tax dues and ensure that the transfers are as tax-friendly as possible. Gifting property or other valuable assets can often be a strategic move for tax planning. Property involves real estate, land, and valuable personal possessions, the cornerstone of many estate planning strategies.
Difference between Gifting and Transfer
Property Gifts: A property gift is a transfer of ownership of an asset from one individual to another without receiving anything in return. This can include gifts of cash, property, shares, or other assets. Gifts can be made during an individual’s lifetime or through a will after death. Not all gifts are exempt from tax and may be subject to inheritance tax (IHT) if they exceed the annual gift exemption limit of £3,000. Gifts made within seven years of an individual’s death may also be subject to IHT.
Property Transfers: A property transfer is a legal process of transferring ownership of an asset from one individual to another. This can include the sale of property, the transfer of shares, or the transfer of ownership of a business. Unlike gifts, transfers typically involve exchanging money or other assets in return for the transfer of ownership. Property transfers may also be subject to various taxes in the UK, including stamp duty land tax (SDLT) on the sale of property and capital gains tax (CGT) on the sale of shares or other assets.
Types of Property Gifts
There are three types of property gifts: gift with reservation of benefit, potentially exempt transfer, and chargeable lifetime transfer.
Gift with Reservation of Benefit
A gift with reservation of benefit is a gift where the donor retains some benefit or enjoyment from the gifted property and can include the right to live in a property rent-free or to receive income from the gifted property. In this case, the gifted property is not considered fully transferred, and the donor may still be liable for tax on the gifted property. In addition, if the donor dies within seven years of making the gift, they may be subject to inheritance tax on the value of the gifted property.
Potentially Exempt Transfer
A potentially exempt transfer is a gift where the donor gives away their property and survives for at least seven years after making the gift. The gifted property is not subject to inheritance tax if the donor survives for seven years. The tax amount owed is based on the value of the gifted property and how much time has passed since the gift was given.
Chargeable Lifetime Transfer
A chargeable lifetime transfer is a gift where the donor gives away their property and pays the inheritance tax on the gifted property upfront. The donor must pay the tax within six months of making the gift. The tax due on a chargeable lifetime transfer will depend on the value of the gifted property and the donor’s available tax exemptions and reliefs. In addition, if the donor dies within seven years of making the gift, the gifted property may still be subject to further inheritance tax.
Types of Property Transfers
Property transfers can be through various means, including as a gift, sale, or gift with reservation of benefit. Each type has its tax implications.
Transfer of Property as a Gift
A gift transfer of property is when the property owner voluntarily transfers ownership to another person without receiving anything in return. There are different reasons to consider doing this, such as assisting a family member or friend or decreasing an estate’s size to minimize tax liabilities. However, there are tax implications when transferring property as a gift. The gift recipient may be subject to inheritance tax, a tax on property transfer from one person to another. However, some exemptions and exclusions can be used to minimize IHT.
Transfer of Property as a Sale
A sale transfer of property is when the property owner sells the property to another person in exchange for money or other consideration. A most common type of property transfer in the UK. When selling a property, the seller may have to pay capital gains tax, which is a tax on the profit earned from the sale of an asset. However, please be aware that exemptions and deductions are available that can significantly decrease or even eliminate the capital gains tax.
Transfer of Property as a Gift with Reservation of Benefit
A gift with reservation of benefit transfer of property is when the owner gifts the property to another person but retains the right to use or benefit from the property. When transferring property as a gift with reservation of benefit, the transfer may be subject to inheritance tax, which is a tax on the transfer of property upon death. Thankfully, exemptions and reliefs can help minimize or eliminate the need to pay inheritance tax.
Tax Planning Strategies for Property Gifts and Transfers
Several tax planning strategies can be employed for property gifts and transfers to minimize tax liabilities and maximize benefits. This section will explore the various tax planning strategies available, including lifetime gifting, trusts, deed of variation, joint ownership, business property relief, agricultural property relief, and other tax planning strategies.
Lifetime Gifting
Lifetime gifting is transferring property during one’s lifetime to a beneficiary. This can include gifting cash, property, or other assets. Lifetime gifting reduces the value of one’s estate, thereby reducing the amount of inheritance tax that will be due upon death. Any gifts made within seven years of death will be subject to inheritance tax. Additionally, if the gift exceeds the annual exemption limit of £3,000, it will be subject to the gift tax. However, if the gift is made to a spouse or charity, it will be exempt from gift tax. You can give multiple gifts to different people, with each gift not exceeding £250. However, you cannot gift someone who has already received your full £3,000 annual exemption. It’s worth noting that these gifts are not subject to Inheritance Tax.
Lifetime gifting has several benefits, such as decreasing one’s estate value, potentially lowering inheritance taxes, and providing financial aid to loved ones while still alive. It is important to know the drawbacks, including the possibility of losing control over the gifted property and the risk of the beneficiary misusing or wasting the gifted assets.
Use of Trusts
A trust is a legal arrangement in which property is held by a trustee for the benefit of a beneficiary. There are several types of trusts, including discretionary, interest in possession, and bare trusts. Trusts are designed to offer financial assistance to family members while reducing tax obligations.
Any income generated by the trust will be subject to income tax. Additionally, if the trust exceeds the inheritance tax threshold £325,000, it will be subject to inheritance tax. However, various exemptions and reliefs are available, including the annual exemption, spouse exemption, and business property relief. Setting up a trust has several benefits, such as offering financial assistance to loved ones, potentially lowering inheritance tax obligations, and retaining control of the gifted assets. However, it is important also to consider the drawbacks, such as the potential expenses of establishing and maintaining the trust and the chance of the trust being subject to tax liabilities.
Deed of Variation
A deed of variation is a legal document that allows beneficiaries to alter the terms of a will after the testator’s death. The purpose of a deed of variation is to redistribute assets tax-efficiently, thereby reducing tax liabilities.
Any changes made to the will must be made within two years of the testator’s death. In addition, any changes made must not increase the amount of inheritance tax due. However, if the deed of variation redirects assets to a charity, it can reduce inheritance tax liabilities. Using a deed of variation includes redistributing assets tax-efficiently, potentially reducing inheritance tax liabilities, and providing financial support to loved ones. But the disadvantage of this structure is the potential for disputes among beneficiaries and the potential costs of legal fees.
Joint Ownership
Joint ownership is the process of owning property jointly with another person. It is joint tenancy, where both parties own the property equally, or tenancy in common, where each party owns a specific share of the property. The purpose of joint ownership is to reduce the value of one’s estate, thereby reducing the amount of inheritance tax due upon death.
Any jointly owned property will be subject to inheritance tax upon the first owner’s death. In addition, any income generated by the property will also be subject to income tax. However, several exemptions and reliefs are available, such as the spouse exemption and business property relief. Joint ownership includes the benefits of reducing the value of one’s estate, potentially reducing inheritance tax liabilities, and providing financial support to loved ones. However, one potential drawback of joint ownership is the risk of losing control over the shared property and the possibility of disagreements between co-owners.
Business Property Relief
Business property relief is a tax relief that is available to individuals who own a business or shares in a business. The purpose of business property relief is to reduce the value of one’s estate, thereby reducing the amount of inheritance tax that will be due upon death.
The business or shares must be owned for at least two years before they are eligible for Relief. Additionally, the Relief is only available for certain types of businesses, such as trading businesses or businesses that own property used for trading purposes. Using business property relief includes reducing the value of one’s estate, potentially reducing inheritance tax liabilities, and providing financial support to loved ones. It’s important to consider the potential downsides, like the risk of the business failing or the value decreasing.
It’s important to remember that tax regulations change and people’s tax circumstances differ. For this reason, it’s recommended to seek guidance from a professional before taking any action regarding property gifting. If you need help with Capital Gains Tax or Inheritance Tax; we have tax experts who can help you. Call our office to discuss your case.