May 22, 2024

Property: The gift with strings attached

Any property you own will almost certainly be the biggest investment you’ve ever made and the biggest asset you own. The practice of passing property down the generations is an integral part of family custom all over the world. But in the modern world of increasingly sophisticated – and confusing – indirect taxation the consequences of passing on that kind of wealth can be severe.

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Inheritance tax rules then and now

A rudimentary form of inheritance tax was introduced in the mid-19th century but it has been gradually refined and expanded by acts of parliament over the decades. Today, the tax liability on an individual’s estate can be enormous. The current rate of taxation is 40% chargeable on the value of the estate which is above the threshold. In 2021 the tax-free threshold is £325,000. The average UK house price is £249,000 but it can be far above that, as the Office for National Statistics shows: For example, modest terraced houses in outer London can easily sell for £800,000. It’s easy to see how quickly that threshold is eaten up, leaving your inheritors with an asset whose value suddenly collapses.

Mindful of the need to make gifting property seem fairer, the government made several amendments and concessions. Firstly, if your property is being left to children or grandchildren then in most circumstances your threshold increases by £125,000 to £500,000. Secondly, for married couples and those in civil partnerships, if one partner’s threshold is not reached by the value of the assets they leave, the unused portion can be transferred to the partner. Theoretically the surviving partner’s threshold could then increase to £1 million.

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Beware the detail

There are significant limitations to these provisions. The £125,000 applies only to your main residence so will not reduce the tax liability on any other properties you might own. Furthermore, only direct descendants can benefit, so it won’t help nephews, nieces, siblings or friends. You need to plan carefully so it’s imperative to seek professional advice on gifting property.

Given the remorseless rate of house price inflation there’s every chance your threshold is won’t be sufficient to relieve all tax liabilities. One solution could be to transfer ownership of your property now. This is known as a Potentially Exempt Transfer. If you live for more than seven years after the transfer, it becomes exempt but to qualify it has to be a genuine transfer, which means you either move out of the property or pay market rate rent to the new owner.

So there are measures you can take to minimise the tax consequences but there is nothing to be gained and a lot to lose by delaying. Seek advice today.