4 Tips on Gifting Property and Tax
Ever wondered about the tax implications of gifting property? Maybe you’ve had property gifted to you and you didn’t realise there were any tax liabilities?
Wherever you sit on the scale, we can help. At TaxScouts, we not only file your tax return for a discounted, fixed fee exclusive to NRLA members but we can also offer one-off tax advice to anyone that needs a hand understanding their tax situation. Learn more here.
What does it mean to gift property?
As it says on the tin, gifting a property means passing the ownership rights of your property over to someone else without a fee. This includes properties inherited as part of someone’s estate, as well as properties gifted to you while the owners are still alive.
All residential properties are included, whether that’s a penthouse, a studio flat, a bungalow or a mansion.
Here are our four top tips to get your head around everything you need to know, and what you need to do before you gift property, or receive a gift.
1. You can gift it to your spouse
Central to how tax works when it comes to gifting property is who you gift to.
If you gift to your spouse or civil partner, you’re exempt from paying most taxes. The same goes for if you gift to your child and place the property in a trust for them to claim when they’re old enough.
However, in the case of your child, they will owe tax when the property comes out of the trust.
2. The taxes owed for gifting property
There are four potential taxes that you’ll be charged if you gift or receive gifted property.
Capital Gains Tax
This is the main tax to be aware of. You pay Capital Gains Tax on the profit you make from selling an asset, including property. But it’s only owed if you make more than £12,300 in profit.
You pay CGT at either 18% or 28% depending on your overall income.
However, be aware that there are certain circumstances where you won’t pay CGT if you gift property. If you gift a property to your spouse, place it into a trust for a child or if the property you’re gifting was your main home, you’re exempt from paying CGT.
Stamp Duty
Stamp Duty Land Tax is a tax you pay when you buy a property.
You, the gifter, will not have to pay Stamp Duty. But the person you gift the property to may be liable to pay it.
When you gift to your spouse or to someone who already owns the property, they will owe an extra 3% on top of the normal rate of Stamp Duty. Otherwise, the only other time you’ll owe Stamp Duty on a gifted property is if there’s an existing mortgage left on the property; Stamp Duty will be owed on the remaining mortgage balance.
Inheritance Tax
The thorn in everyone’s side - Inheritance Tax (IHT)!
You’ll only owe Inheritance Tax on an estate worth more than £325,000, so if your property (plus any other assets) total less than this, you’ll be covered by the Inheritance Tax Allowance. Here are the current IHT rates.
If you gift the property more than seven years before your death (apologies for the morbid thought…), you’re also exempt from IHT.
In all other circumstances, unfortunately, you’ll be liable.
Rental Income Tax
It’s unlikely that you’ll owe Rental Income Tax on a gifted property unless you’re also inheriting a tenant! Unlikely as this may be, it’s important to know the facts. If your gifted property comes with a tenant, you’ll owe Income Tax at a rate based on your overall income, including the rent.
Use the TaxScouts Rental Income Tax calculator to check an estimate of what you’ll owe, and how much you need to save.
There are a couple of allowances that you benefit from when it comes to earning rental income. If you also live in the property you’re renting, you can claim the Rent-a-Room scheme: up to £7,500 in tax-free rent.
If you’re not living in the property you’ve been gifted, you get up to £1,000 tax-free rent per year through the Property Income Allowance.
3. Mates' rates won't change your tax position
It may be tempting to try to get around HMRC by giving away property for favourable rates to your friends, but as with most loopholes, it will probably end in you getting fined.
Even if you sell your property at a low cost to what’s known as connected persons (parents, children or siblings, etc.) you/they will be taxed at the property’s market rate, not your lower one.
4. You don't just pay by Self Assessment
Up until 2020, the way that you paid CGT on a gifted property was either by Self Assessment or using HMRC’s Real Time Capital Gains Tax Service. But from April 2020, this changed.
Now, you can only pay the CGT you owe via the Real Time CGT Service. This means you have 30 days from gifting the property to pay the bill. Read more here.
When it comes to Rental Income Tax, you can pay this bill via a Self Assessment tax return by 31st January.
For Inheritance Tax, it’s another method again. You can pay straight to HMRC from your bank account here, or you can enlist the help of a solicitor to manage the process for you.
