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Garstang: 01995 602 129 
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Our expert local solicitors for Wills and Property discuss making gifts of your property to your children during your lifetime. 
At MG Legal, our expert property solicitors often act on behalf of clients who are either selling their home to their children (the children being adults) or buying a home from their parents. Whilst this can be acceptable in many circumstances, if you are considering doing this – either as the parent or the ‘child’ – you must make sure that the house is being sold/purchased at the correct value. If the house will be valued at less than what it would be worth on the open market, you must make sure you understand the implicat. 

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What are the tax implications if you sell your house to your children? 

If you are selling your house to your children for less than the market value, you are essentially making a gift to your children of the difference between the sale price and value of the property. For example, if your property is worth £250,000, and your children are buying it for £200,000, this means that you are gifting them £50,000. As a result of this, there will be various tax implications that you should consider before deciding to proceed with the sale. 
 
If you are selling your main residential property to your children at an undervalue, your children’s property buying solicitors will probably need written confirmation that the money is a gift and that you do not expect for it to be repaid either during your lifetime or after your death, especially if your children are purchasing with the assistance of a mortgage
 
This is because, if you expect the money to be repaid, your children’s mortgage lender will want confirmation that their interests are not being potentially overridden by yours. The requirements of each lender can vary, and therefore if your children are purchasing your property at an undervalue with the assistance of a mortgage, they should make their mortgage broker (or their lender directly) aware of the gifted deposit as soon as possible to prevent any delays arising later. 
 
In addition, make sure that you as the seller and your children as the buyer make your respective property solicitors aware of this so that the formalities can be completed as soon as possible in the conveyancing process. 

What are the risks of gifting a property? 

It doesn’t matter whether you’re gifting your children part or all your property, there can be implications after your death. 
 
Everyone has an annual gift exemption of £3,000. This means that any gifts made during your lifetime of up to this amount each year are free of inheritance tax. This exempt amount can be carried forward by a maximum of 1 year, every year. For example, if you gift £5,000 to your child in 2015, but you didn’t make any gift in 2014, this gift would not be subject to inheritance tax (without considering any other factors, such as other gifts made during that year by you). 
 
Any gifts made above your annual exemptions (not including putting money into trust) are called potentially exempt transfers (PETs). PETs do not usually incur immediate tax charges but could be subject to inheritance tax charge after your death, if you die within 7 years of making the gift. 

How do potentially exempt transfers work? 

Well, if you have made a gift above the value of your annual exemption and you die within 7 years, the gift could be subject to inheritance tax. The inheritance tax will be tapered, depending on how close to your death the gift was made. The current taper relief scale is as follows:- 
Years between when the gift was made and the date of death: 
The percentage of tax that will be payable:  
Less than 3 
40% 
3 to 4 
32% 
4 to 5 
24% 
5 to 6 
16% 
6 to 7 
18% 
7+ 
0% 
Therefore, the transfers are called PETs, as they are only potentially exempt from inheritance tax. If you die within the 7 years, the gifts will reduce your nil rate band, discussed in our previous blog, here, before it is applied to your estate. This means that if you have made gifts during your lifetime of £300,000 (and they were made less than 7 years ago), your nil rate band would be applied against the gifts first, leaving only £25,000 to apply against your residuary estate. 
 
If you apply this concept to your property, if you make a gift of part of it to your children, it could be subject to inheritance tax after your death. A transfer of property as a gift is known as a ‘transfer by way of gift’. 

Can I gift my house to my children but still live in it? 

If you gift your property to your children but continue to live there, this is called a gift with a reservation of benefit, which means that it could still be considered for inheritance tax purposes, regardless of whether you survive for 7 years or more after making the gift. If you want to avoid this from happening, you must pay rent (at the market rate i.e. what a similar property would achieve in rental income). This would prevent the gift with reservation of benefit rules from applying to your property. 
 
There may be other tax implications that could impact your decision about whether to sell or gift your property to your children, such as Capital Gains Tax (which they may have to pay if they sold the property in the future). 
 
You should always seek advice from experts before deciding whether to gift your property to your children or to buy your property from your parents. 

What other things should I consider before gifting my house to my children? 

There could be other factors to consider before gifting your property to your children (or selling it to them at an undervalue). 
 
Some of these are: 
 
Insolvency – if your children are declared bankrupt in the future, the property could be recovered as part of the proceedings. 
Family breakup – if your children are involved with divorce proceedings or dissolution of civil partnership proceedings, the property may be considered in any related financial agreement. Even if you continue to live in the property, it could still be accounted for, which could leave you in a vulnerable position. 
Care home fees – even if you transfer your property to your children at only an undervalue, as opposed to transferring it to them for no value, you could find that the Local Authority believe that you made the gift to deliberately deprive yourself of your assets, and its value may be brought into account in any Local Authority Financial Assessment. 

Should I seek legal advice from expert solicitors near me? 

Always. Before making any gift at an undervalue or transferring your property to your children with nil consideration, you should seek expert legal advice. At MG Legal, our expert team offer initial consultations at a fixed-fee cost of £75 plus VAT. 
 
For matters relating to inheritance tax, you would need to contact our Wills and Probate department at your local office, here, or via email to wills@mglegal.co.uk
 
Unfortunately, even though we aim to provide as much information as possible in our blogs, we are unable to cover everything and there are plenty of factors that can affect the transactions discussed above which you may need to consider. To discuss your circumstances and the steps you want to take in respect of your property, contact our team
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