News | June 18, 2020

Residential property – a good time to gift?

UK residential property prices have been unsurprisingly subdued since March this year and, depending on the speed of the Covid economic recovery and any “second spike” in the disease, the expectation is that they will drop further still in the near-term. Whilst this is disappointing news for sellers, now is a good time for those looking to mitigate the incidence of inheritance tax (“IHT“) on a property by gifting it to family members.

Property is often the most valuable asset in an individual’s estate and will be subject to IHT on death at the rate of 40%. The IHT nil-rate band of £325,000 and the “residence nil-rate band” of £175,000 will go some way to covering the value, but there will often be a surplus subject to tax. Giving away all or part of a property during lifetime is therefore sensible estate planning, if it can be done within the tax rules. The value of the gift is fully outside the donor’s estate for IHT purposes after seven years.

There are anti-avoidance rules that prevent you giving away a property and continuing to use or benefit from it, so gift planning with property is often limited to that which you no longer plan to use, or will use very infrequently. Investment properties are a common example. Personal use properties, such as second homes, require a different approach but co-ownership could be a good estate planning option here. If the equity is shared out between those family members who also use the property, with the donor keeping a share, the IHT cost on the donor’s death should be limited to their percentage share only.  

Gifting an asset will trigger a capital gains tax (“CGT“) charge if that asset is standing at a gain. This is where the property market downturn presents an attractive opportunity. A gift of a property whilst the value is at a low, may trigger no or minimal gain, or one within your CGT annual exemption of £12,300.

A valuation of the property should be carried out before the gift is made. The current lack of data on comparables will make obtaining a reliable desktop valuation difficult and more prone to challenge by HMRC. Owners should therefore resist the temptation to save cost and arrange for the property to be inspected before valuation, if possible.

If you would like to discuss gift planning with property, please contact me or your usual Wedlake Bell adviser. The Private Client and Residential Property Teams work closely together on this type of work so as to ensure the gift is effective for tax purposes as well as registered for Land Registry purposes.