Gifting Investment Property: Smart Tax Planning or a Costly Mistake?

As property investors grow their portfolios, at some point many begin to look ahead to consider how best to pass assets down to the next generation. While gifting investment property can be a good move from an inheritance tax (IHT) perspective, it is not without its tax implications. Understanding these is vital to make an informed decision.

Transfers between spouses

Transferring property to your spouse or civil partner is generally straightforward, with no Capital Gains Tax (CGT) or Inheritance Tax arising from the transfer. However, if there’s a mortgage on the property and the new owner assumes responsibility for it, Stamp Duty Land Tax (SDLT) may be payable.

Gifting to Children or Other Family Members

Gifting a buy-to-let property to a child or relative can be a popular choice for those looking to reduce their IHT exposure, but only works where the donor does not need the income from it.  We cannot just look at IHT in isolation when tax planning as gifting often triggers other taxes.

Capital Gains Tax (CGT)

From a tax perspective, gifting is treated as though you had sold the property at its full market value. That means you could incur a CGT liability calculated on the gain from when you bought the property to when it is gifted.  This often is a real problem given no cash has been generated with which to fund the tax charge.

Unfortunately, there are no CGT exemptions just because the property is gifted instead of being sold.

Can I Defer Capital Gains Tax?

In certain circumstances, CGT can be deferred, most notably through qualifying reinvestment in approved schemes such as the Enterprise Investment Scheme (EIS). These are specialist investments and ones which carry risk.  Specialist tax and investment advice would be needed if you want to explore this option.

Stamp Duty Land Tax (SDLT)

If any mortgage debt transfers from the transferor to the recipient, SDLT is assessed on the value of that debt. If the recipient already owns a property, the additional property SDLT surcharge of 5% may also apply, substantially increasing the tax due.

Inheritance Tax (IHT) and the Seven-Year Rule

A gift of property is generally treated as a Potentially Exempt Transfer (PET). This means it can fall outside your estate for IHT purposes, provided you live for at least seven years after the gift is made.

If you die within that period, the gift would be taken into account when calculating your death estate, although IHT may be reduced on a sliding scale after year three.

Could a trust help?

Another route worth considering is placing the property into a trust. This allows you to retain an element of control, not only for your children, but future generations too.

However, gifts into trust are not treated as potentially exempt like an outright gift would be. Instead, they are classified as chargeable lifetime transfers (CLTs). If the value placed into trust exceeds the available nil-rate band (currently £325,000), an immediate 20% IHT charge may apply. 

There is a further pitfall to avoid.  Without careful planning, the commonly known "seven-year rule" can effectively turn into a “fourteen-year rule”.  This arises when someone makes a gift into a trust and then, within the next seven years, makes a further gift directly to an individual, which is treated as a PET.  If the person passes away within seven years of making the PET, both the earlier CLT and the later PET are taken into account when calculating the value of the estate for inheritance tax purposes. This can significantly increase the overall IHT liability.

Trust law and tax administration can be complex and costly, so the right advice is absolutely essential.

Final Thoughts

Reducing inheritance tax through gifting property can be highly effective, but it must be approached with full knowledge of the tax consequences. CGT, SDLT and IHT all need to be considered individually and as part of the wider financial picture.  You also need to ensure any advice is up to date.  Tax rules can, and do, change, sometimes with little notice.

Before transferring any property, please do speak to us as the wrong decision could result in an unwelcome tax bill.  On the other hand, the right one could save your loved ones a lot of money further down the line.

Do you need help planning for your family’s financial future?

If you want to talk through your options, do not hesitate to get in touch.  We are here to help.