Four tips to ensure the success of a lifetime gift of real estate – Taxation
UK: Four tips for a successful lifetime gift of real estate
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For most clients, real estate (whether it’s the family home or a vacation villa) is one of their biggest assets. In light of this, many people are considering donating real estate to family members as part of their lifetime tax planning. If there is an outright donation of the property, it will be a potentially exempt transfer. This means that as long as the parent survives for seven years, they will not be included in their estate for inheritance tax purposes in the event of death. This would avoid a potential charge of 40% on inheritance tax.
However, it is not enough to simply transfer ownership and continue as usual. Unless there is a shared occupation of the property, where different rules apply, the parent must donate the property on an “unconditional” basis if a lifetime gift avoids inheritance tax. . The rules state that property should be valued with the total exclusion, or virtually the total exclusion of the donor. What this means in practice may be a gray area, with little further indication of what “virtually” entails and the benefits that can still be reaped.
With HMRC becoming increasingly vigilant about such transfers and asking for more evidence than ever to prove that there is no continuing benefit, we outline our top tips for ensuring a successful lifelong donation. of real estate.
1. Document how the current relationship will be governed
In most cases, when the family home is transferred outright to the children but the parents continue to live in the property, there could be an (arm’s length) lease granted to the parents by the children. In cases where the benefit will be more ad hoc, a license could state the number of nights that will be spent in the property and the market rate payable for it. A word of warning. If, in practice, the property is available whenever the parents wish to use it, an annual rent may still be due. Income tax will be payable on the rent received by the children, but this can be another effective way to gain value on the parent’s estate.
2. Pay the market rent
Even if this is only a week in the property or a longer term arrangement, no concessions can be made. An appraisal should be performed to determine the appropriate rent to be paid and this should be documented in the lease or license. An independent third-party appraisal should be undertaken and on file, so that you can demonstrate to HMRC that the appropriate amount has been paid.
3. Schedule rent reviews
The document should include a rent review clause to ensure the parent continues to pay market rent. Without a review clause, there is a risk that in the future the rent will be reduced compared to the rest of the market; any savings will result in a service reserve.
4. Obtain a current market valuation
At the time the donation is made, obtain a current market valuation and keep it in a safe place for future reference. This should crystallize the situation if there is a death within 7 years for the donation to become attributable. Inheritance tax will only be payable on the value of the property at the time of its donation. If real estate prices fall so that the property is worth less on the date of death, that lower price can be substituted if the property still belongs to the person to whom it was transferred.
There are other taxes to consider. The stamp duty property tax should not be a problem if there is no consideration received for the donation. In addition, capital gains tax will not be payable if the donated property is considered to be a principal residence, but capital gains tax could be an obstacle if the donation is a second property, a rental property or a vacation home. If capital gains tax is due, it is particularly important to consider whether life insurance should be taken out to cover the 7-year risk for inheritance tax purposes; an immediate imputation of capital gains tax and no savings in inheritance tax would not be a good result.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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