There are many reasons why you may wish to transfer your property to family members at an undervalue or even gift it entirely. It can be an attractive proposition from a tax perspective in terms of your estate planning. It might be that you want to help your offspring get a foothold on the property ladder or even to benefit from the rental income of a commercial property you own. Perhaps you want to release some equity and your child has been able to obtain a mortgage and fund a reduced purchase price – both for parents of advancing years who might not be able to obtain a repayment mortgage easily, and their children, this could be a win-win solution.
Gifting your family home to your child means you would no longer be the homeowner and would have no rights to the property, so this is not a decision to make without careful consideration of the risks. No-one expects or wants to outlive their own children, but it can happen. Divorce, a failed business or other financial catastrophes can also happen, and you will have less resources to help them if you have already gifted your most valuable asset.
It is important to note that if you have gifted the property to your child but intend to continue living in the property, you will have to pay the market rent if you want it to sit outside your estate for inheritance tax purposes.
Whether you incur a CGT tax bill will largely depend on who you have gifted the property to and whether the property is your main home.
How much capital gains tax will I pay on a property I have gifted or transferred at an undervalue?
You can transfer a property to a husband, wife or civil partner without incurring a tax bill, even if you already own the property – provided it is your main residence. This exemption only applies if you have lived together during all of that tax year and are not estranged.
If your partner later sells the house, they might have to pay tax on any gain they have made subject to using their tax-free allowance currently set at £12,300. However, it is important to note that the gain will be calculated based on the difference in value between when you first bought the house and when your partner disposes of it.
Alternatively, you could choose to share ownership of the property so that you can use both tax-free allowances (thereby doubling to £24,600) when you eventually dispose of the property. One of the key considerations here is due consideration of the tax bands that you and your partner fall into. If one partner earns substantially less, the CGT tax band liability they face will drop. For example, basic-rate taxpayers pay 18% for gains on rental property, while it is 28% for higher-rate taxpayers.
Another way of gifting property without paying capital gains tax is to pass your main home to any or all of your children, which means you qualify for ‘private residence relief’. The rule for this relief requires the house to have been your main residence for the entire time you have owned it. However, if you are gifting a property that is not your main residence such as a buy-to-let or a commercial property, you will be liable to pay the capital gains tax.
Do you have to pay stamp duty or Land Transaction Tax on gifted property?
The short answer is that this depends on whether the house is mortgaged.
If you gift your children a property, they will not have to pay stamp duty (or land transaction tax in Wales) if there is no mortgage to pay off. If there is a mortgage, they will have to pay stamp duty or LTT on the value of the outstanding loan and either settle this mortgage or, with the lender’s consent, take over the repayments. Some lenders might require you to stand as a guarantor if they allow the mortgage payments to be taken over by your child or children.
Insolvency – what happens if I become insolvent?
In both instances, whether it is a sale at an undervalue or a gift transfer, the law in this area is very clear. If a transfer at an undervalue takes place more than five years before the presentation of a bankruptcy petition, the transaction is ‘safe’ – this means that if you become insolvent, the transaction would not be set aside (reversed).
If such a transaction takes place less than two years before the petition, then it will be set aside; this means that the transaction would be reversed and the property becomes part of the trustee in bankruptcy’s estate for sale and distribution.
If the gift or undervalue transaction takes place more than two years but less than five years from the issue of the petition, then it cannot be set aside unless the person gifting or transferring at an undervalue the property was insolvent at the time of the transaction or became insolvent as a result of the transaction. It is important to note that there is a presumption of insolvency which must be disproved, if the parties to the transaction are family.
For this reason, lenders lending on a purchase at an undervalue are increasingly insisting that their borrowers obtain an ‘Insolvency Act legal indemnity policy’ to cover any reasonable losses the lender would incur as a result of the transaction being set aside.