Taxation Treatment for Gifted Properties

If you are considering gifting a property it is important to understand exactly what the taxation implications of this decision would be. The relevant taxes to consider would be Stamp Duty, Capital Gains Tax, Inheritance Tax and Income Tax.

Stamp Duty

The first question to ask here is whether there is a mortgage on the gifted property. If the answer to this is “yes” then stamp duty will be payable on the outstanding mortgage value. In addition if the recipient of the gift already owns a property, the additional stamp duty on second properties rates will apply which are 3% above the standard rates. If there is no mortgage on the property, then no stamp duty will be payable. It is also important to inform the mortgage provider of this type of transaction.

Capital Gains Tax

Capital Gains Tax if payable on properties which are disposed of which have not been a person’s main residence for the full time that the property was owned by that person. If the property was a main residence for part of the time it was owned then CGT will only be payable for the proportion of time it wasn’t being used as the main residence.

Gifted properties incur CGT on gains above the capital gains tax allowance (currently £11,100) of 18% for basic rate tax payers and 28% for higher rate tax payers. This tax can be paid in 10 equal annual instalments however interest of 3% per annum would be payable in addition to the tax charge.

If the property has been sold to a “connected person” (e.g. child, parent or grandparent) at below market value (including zero value for gifted properties), the tax is calculated based on the market value not the actual value.

Inheritance Tax

Inheritance Tax is payable at a rate of 40% on the value of a person’s estate over the IHT allowance which is currently £325,000. Over the next 4 years the family home allowance will also be phased in and will increase the IHT allowance by an additional £175,000 by 2020-21 for estates where a property that was the main or “family home” is being passed to children, foster children, stepchildren or grandchildren.

Gifted properties are classified as “potentially exempt transfers” for Inheritance Tax purposes.  This means that if the gift was made between 3 and 7 years before the death of the donor, the tax charge reduces by 8% for each additional year from the initial rate of 40%. After 7 years there is no Inheritance Tax payable on the gift.

Income Tax

Income tax is payable on rental income.

If a property has been gifted to a person who is less than 18 years of age, the tax charge will be levied on the donor regardless of who receives the rental income.  If however the person receiving the gift is an adult then they will be liable for income tax on any rental income arising

The above information demonstrates the complexities involved in understanding gifted property tax treatment and it is recommended that you seek the advice of a professionally qualified adviser before entering into any transactions of this type.