What are the implications if you gift a house to your child?

It is not unusual for a parent, especially one who is elderly, to consider how to deal with their assets, property, and investments. The parent might consider this as part of an estate or Inheritance Tax (IHT) planning review. Alternatively, the parent might simply wish to transfer the house to their child because they no longer have any use for it.

Whilst this might sound very straightforward, it is, perhaps, not as simple as it might seem.

Transfer of the title to the child

Perhaps the most basic option is for the parent to simply transfer the title to their child. This is usually done by way of a “love, favour and affection” Disposition. This means there is no price paid by the child to the parent.

However, because the child did not pay anything for the house, should they decide to sell it, they are likely to face a potentially large Capital Gains Tax (CGT) charge on their sale. The most basic of calculations to work out the gain are to subtract the purchase price (in this case zero) from the sale price. From the resulting figure, deduct the personal allowance. This is currently £6,000 but will possibly reduce to £3,000 in April 2023. The child will then pay 28% in CGT on the property.

As an alternative, should the child move from their existing home into the home gifted by the parent and then use that home as their main residence, CGT will not apply if they sell. When they then sell their former home, CGT will apply to the gain they make.

Transfer through a Will

It might be more beneficial for the parent to transfer the title through their Will. If they do this, the value for CGT purposes will be the value at the date of death of the parent. If the child disposes of the house, the calculation of CGT will be based on the sale price less the value at the date of the parent’s death, less the personal allowance. This is likely to reduce the exposure to CGT.

Impact on the parent gifting the property

A parent may gift the property with a view to reducing the exposure of their estate to Inheritance Tax (IHT). Providing they live for at least seven years after making the gift, the house, and importantly, the value of the house, will no longer be counted as part of their estate.

However, there is one very important aspect of this type of transfer that must be taken into account. If the parent gifts the house to the child but continues to live in it rent-free, it will be considered a gift with reservation. This means the value of the house will be included as part of their estate when they die. The only way round this is if the parent pays a market rent to the child after the property is transferred.

Before you do anything, it is essential you seek professional advice from your solicitor.