Gifting property to children for below market value: Can it really be done… legally?
Gifting property comes with a stigma. One of tax evasion and sneaking through loopholes that very few of us wish to be associated with. And this is despite that fact that (providing you do it by the book), gifting property to children is completely legit and above board. If anything, it's quite crafty. Call it a hassle-free way to sell your house
You see, by gifting your property to your child, you'll be in control. Unlike a traditional open market sale, you'll also be able to cut out the whole escapade of finding a reliable buyer, saving you marketing costs, agent fees, awkward offer negotiations - the list goes on. In fact, by selling your house to your child for a £1, you negotiate your own offer, which can turn out to be handy, particularly if the property in question is slightly niche or a 'problem property' - i.e. something you'd struggle to sell through the open market
But, that's not to say that selling your house to you children is easy. Fail to handle it by the book and this act of gifting property can actually be quite risky, both from a financial and legal standpoint. Therefore, being at least aware of the pros and cons before ploughing ahead with any paperwork would be a wise idea. Speaking of which, we've saved you the legwork. Read on to discover if you can sell your house to your son for £1, plus an insight into the process...
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- Is it illegal to sell a house to a family member?
- What are the costs of selling a house to my child?
- Hang on - is it better to gift or inherit property?
- Why should I gift property to my children? What's the perk?
- The risks that come with gifting property to children
- Should I really sell my house to my son or daughter for £1?
Contrary to what you might think, selling your house to a family member is 100% legal. The only time it isn't is when you're doing so to avoid tax; it's only then that the legality starts to fluctuate.
While there's a lot of tax impactions that come with gifting a property, the most notorious (i.e. the ones to watch out for) are inheritance tax and Capital Gains Tax (also known as CGT). Keep these at bay and the cost of your gift should be minimal. However, that's not to say there aren't a few other costs that you may incur along the way. Speaking of which...
Now, there's no getting round the fact that selling your house to your son for a £1 would dramatically cut the cost of your sale. But, that's not to say it'd eradicate them altogether. In fact, gifting property doesn't come cheap, so anyone looking to do so, will likely need a fair bit of money behind them. A potential speed hump right from the offset, especially if you're doing so to withdraw equity - hence why it's first on our agenda. So to ensure that gifting property is the right strategy for you, here's just some of the costs that you can expect when selling your house to a family member for an unusually price tag...
- Capital Gains Tax (CGT) - If the property you're looking to gift was bought 10 or more years ago, then it's likely you'll have to pay some form of Capital Gains Tax. Long story short, if a property has significantly increased in value when you come to sell, then CGT is due. How much is obviously bespoke to your situation, however CGT costs have know to range from a few hundred pounds all the way into the tens of thousands. So this is a cost well worth estimating before you even consider giving a solicitor the green light.
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- FYI: Any capital gains you make after the transfer (i.e. rental income) will also incur CGT. So if you plan to sell your property to your child as a way to give them a second income, this may become a regular cost.
Inheritance tax - Granted, you don't pay inheritance tax straight away, but by gifting a property, you could be liable to pay it in the future. Whether you do or not really depends on timing; providing you live for 7 years after the transfer of ownership, then no inheritance tax will be charged. The reason behind this clause is to stop tax evasion, as previously many people would gift property as a way to get out of paying hefty care home fees. So for those below 50, gifting is very much a safe bet, providing of course you're not a tightrope-walking parachuting adrenaline junkie. Plus, what better excuse for a healthy diet?
FYI: Did you know that it's actually cheaper for a child to inherit a property than a spouse or partner. Where the lower bracket for a couple sits at £325k, for gifts to children or grandchildren it sits at £475k
- house repayments cost - Those who are house repayments-free can skip this one, but if you're not, pay attention! You see, when gifting property the amount remaining on your house repayments is crucial, especially if you want to sell your house for something super cheap like £1. This is because the price you 'sell' it for (i.e. the sale price - not the gift) has to be above that what's owed on your house repayments. Remember, at the end of the day it's not paid off in full, the house technically still belongs to your lender, so always contact them first to clarify the gift and check that they're willing to transfer the remaining house repayments debt. Otherwise, this could lead to a redoing house payments, which yet again, comes at a cost.
- Stamp duty (SDLT) - Another cost you can incur when trying to sell your house for £1 is Stamp Duty. However, it's not something you should worry about if you're a sole owner, only if the property you're looking to gift has an outstanding house repayments. But that's not to say you'll have to pay Stamp Duty full stop. Whether or not you pay Stamp Duty depends on whether the outstanding finance exceeds the current SDLT thresholds. Thresholds that are now falling as part of the aftermath of the Covid crisis, which saw Stamp Duty rates cut to a record low.
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- Income tax - Among the long term costs of gifting a property to your child, income tax is another one to bear in mind. If your child technically starts earning an income, they'll be charged income tax. Not so much a problem if they're still a toddler, but in the case they're in the working world, this extra income could well muscle them into a higher tax bracket. It's also worth noting that if the property was rented back out to you (i.e. the donee) that income tax would still be payable.
Although it may sound like that by gifting property to your child for £1 they're inheriting it, they're actually not. You see, when it comes down to it, there's actually quite a few differences between inheriting a property and gifting one. The main one being that...
Inheritance tax is what you're liable to pay when someone dies and your earn the rights to their estate. Whereas, gifting property is when you give (i.e. sell) a property to another family member for less than the market value. The difference between the two values is considered to be a gift, which is this case made in equity, not cash. However there are a few more to wrap your head around...
Gifting property VS inheriting property: the similarities
- Whether you inherit or gift a property, you're liable to pay inheritance tax if the estate exceeds a certain value. In both cases, this cost would be incurred after the death of the donee. If you have grandkids, you may want to consider donating to them instead.
- In both scenarios your child inherits an asset and has to pay any charges associated with acquiring it.
Gifting property VS inheriting property: the differences
- When you inherit a property it's because someone his died (R.I.P), whereas when you're gifted a property it's much as it sounds - a financial gift. Therefore, a gift will help you plan your child's future NOW and give them the boost they need NOW, opposed to waiting for 'the' rather harrowing moment.
- Making a gift makes it a lot easier to accurately plan what taxes you'll be liable to pay when it's sold. Whereas by the time inheritance comes around, a property's value could have skyrocket over the threshold, leaving your child with a hefty tax bill.
- Because inheriting a property cannot be forced as such, there's a larger chance that a property which perhaps wouldn't be liable to any form of sales tax at the moment, may be in the future. The price you'll have to pay if capital appreciation pushes your property into taxable territory.
- Providing it's clear where its going, inheriting property is a lot more clear cut. Whereas when gifting property you'll likely be subject to stringent checks and require a valid reason as to why you're choosing to gift. Reason being that tax dodgers are no strangers to gifting.
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The word 'gift' isn't just used for no reason. You see, gifting a house is much like it sounds: taking a lump of your personal finances, packaging them up and sealing them with ribbon and a bow. Not exactly the most visual Christmas gift, but nevertheless one of great value.
Hence why you can't afford to confuse gifting property with the tax-evasive rather negative stereotype, as it really can be used as a force for good. It just so happens that certain individuals have developed a habit of exploiting it. So, here's just a few reasons why you shouldn't shy away from gifting property...
- The first run of the ladder - For young adults, particularly any offspring who are in their late teens or early 20s, a helping hand onto the housing ladder can never go a miss. Something you can do more or less straight away by gifting property. Do so not only would your young avoid being stuck on a low LTV house repayments deal paying sky high interest, but they'd also have the assurance that their primary place of residence is a safe and secure place to live. No one likes to follow through on a purchase only to discover that the area isn't quite what the estate agent said, or that the surveyor forgot a few major details.
- The security of a second income - As much as getting a job is great step for a young adult, the financial commitment that comes with buying a house, can put HUGE pressure on their shoulders. Especially when today house prices aren't cheap and the job's market isn't exactly what you'd call diverse. So, it's not surprise that after so long hemmed in the education system, that the majority of young people have some soul searching to do. Something they're a lot more free to do if they have a rental property providing them with a second income.
- Disposing of assets - In the case you have a large family of assets - by that we mean a large property portfolio - selling a property to a family member also allows you to spread those assets more thinly. All of which could result in you paying less tax, which while great, is where you have to be careful. You see, while there's nothing wrong with distributing your assets across your family tree, you must be careful about how you do it. If it's obviously done form of tax evasion, you'll be opening yourself up to a whole web of legal consequences. Hardly ideal.
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As with evaluating anything, you also need to consider the risks that come with selling your property to your son or daughter for £1. Reason being that just like any pricey asset, transferring it into someone else's name doesn't come without its fair share of risk. All things you need to consider when deciding to sell a house privately to a family member.
Saying that though, a lot of the risks do revolve around age. Only we don't have time to list them all, so here's three of the most common...
- Tax implications - While the gifting property may be ideal for your tax liability, it may not be so good for your child's. In other words, by selling them a house for £1 you could end up costing them a whole lot more in tax. Be this inheritance tax if you pass within 7 years of giving the gift, or in CGT from any extra rental income they generate. What's more if the rental income sees them jump up a tax bracket, it's entirely likely that it could cancel itself out. So in effect, they'd be managing the property as well as dealing with its upkeep all for virtually nothing.
- Care home fees - As much as gifting property can help you avoid care home fees, it's not to say that it can prevent you from paying them full stop. Ironically, if a gifted property is still with your child and hasn't been sold on, it can still be considered should you ever have to be omitted to a care. Long story short, if this is part of your financial plan (A) don't tell us because it's most likely illegal and (B) get your child to liquidate the asset pretty sharpish - i.e. sell the house fast.
You could be evicted - Have a fall out with your son or daughter after gifting them a property and it could well come back to bite you. You see, once a house is gifted, the donee (i.e. you) gives the receiver the legal rights to the property, just like they would in a normal house sale. So if they decide that they wish to sell up and withdraw the equity, you'd have no say in the matter. And that's even if the house in question is your primary place of living, in which case you would be a risk of being evicted (gulp)!
FYI: If you're living in the house and your child files for divorce, this could also be the case. Apart from in such an instance, your fate would rest with their spouse too. In other words, if you don't trust their partner, don't even think about gifting them a property.
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This is a tricky one. You see, while you can sell your house to your son for £1, and benefit from doing so, that's not to say that you should.
Indeed, it does give your child a great first step onto the property ladder and help relieve them of the stresses that come with entering the working world; a second income can never go a miss. What's more, when compared to inheritance it's faster, more predictable and doesn't rely on something horrific to go ahead. So there could well be a valid argument for why you should. However, when you consider the risks, we're not so sure it tips the scales.
As you've discovered, the risks that come with selling your house to a family member can be nothing short of catastrophic. You could can be evicted by no fault of your own, end up costing your child WAY more than just £1 and lumber them with responsibilities that let's be honest, they probably don't want.
So while you could say gifting property is an effective way for you to avoid tax and spread your assets more thinly, as a means for giving your child a headstart on the housing ladder, we're not so sure. You see, if you wanted to do that, surely you'd just sell your house and gift them the equity, right?
That way, no care homes can claim it, your child has the freedom to buy a house of their choice (great life experience) and at the same time, you can have the CASH in your bank within as little as 7-days. How?
As an industry leading cash buyer of property with a team rich in over 50 years' experience in buying property, we'll buy your house for CASH in as little as 7 days.
What's more, we're not picky, so whether you're looking to cash out a tired buy to let or prim and proper period home, we can help. As a special thank you for using us we'll even cover your survey costs and legal fees too. Your sale is literally 'on the house' (get it?).
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