Transferring Property Ownership From Parent to Your Child
Parents can transfer ownership of a property to their child in the form of a gift or by transferring equity in the property, but it’s important to be aware of the inheritance tax rules that can still apply.
It is not uncommon for parents to want to transfer a home into their children’s name, for a variety of reasons. Sometimes it is an attempt to avoid, or at least reduce the eventual size of, an inheritance tax bill. In other cases, it is done to help their child get on to the housing ladder.
Whatever the motivation, there are plenty of important steps to consider before you attempt to transfer ownership of your house to a child.
Transferring equity to your children
A transfer of equity is when someone new is added to the deeds of a property, but the current owner remains on there too.
Transfer of equity is a useful option if you have just got married, for example, and want to add your spouse to the property deeds. But it can also be used by parents who want to transfer partial ownership of a property to their children.
If you use transfer of equity, be warned that your child may have to pay stamp duty. From a tax perspective, when the equity is transferred it is as if a property transaction has taken place.
As your child will also now be a homeowner they will no longer be considered a first-time buyer going forward. This means they couldn’t benefit from first-time buyer stamp duty relief or other government-backed schemes designed to help people onto the property ladder, such as the Lifetime ISA, in the future.
How to gift a property to a child
Alternatively, you might wish to gift your property to your child. Rather than handing the child a portion of the equity in the property, this would mean they own the property in its entirety.
While you can gift a property to your child, it is important to be aware that inheritance tax can still be payable in certain circumstances.
Gifting property and inheritance tax
Inheritance tax is charged based on the value of your estate when you pass away. Everyone enjoys a £325,000 tax-free allowance, called the nil-rate band, but you are then charged inheritance tax at 40% on the value of your estate above this threshold. You can combine assets with a partner to increase this threshold to £650,000.
This tax-free threshold can be even higher – as much as £500,000 for each parent or £1 million in total – when leaving your home as an inheritance to your children or grandchildren, if your estate is worth less than £2 million.
If you die within seven years of gifting something to your children, that asset ‒ whether it’s a house, a car, or simply cash ‒ is still classed as being part of your estate when determining whether you need to pay inheritance tax.
As a result, there may be some tax charged against the value of the property, even if your child has taken ownership of it and is now living there. These are known as potentially exempt transfers and the amount of tax payable reduces the longer you live after making the gift, from 40% in the first three years, gradually reducing to 0% after seven years.
» MORE: Estate planning explained
Can I gift my house and still live there?
If you gift the property to your child but choose to continue living in it, you will need to pay rent to the new owner at the current market rate and contribute towards the household bills.
You can’t simply live in it, rent free, as their guest – otherwise it will still be treated as part of your estate after you die, and inheritance tax could be payable, even if you live for longer than seven years after gifting it to your loved one.
Gifting a buy-to-let property to a child
If you are gifting a buy-to-let property to a child, there is also capital gains tax to consider. Expect to pay capital gains tax on any increase in the value of the property since you purchased it, once the ownership of the property transfers to your child.
Whether full entitlement to the rental income that the property delivers passes to your child or not could also affect the usefulness of gifting the property for inheritance tax purposes.
Can I transfer property ownership to someone under 18?
If your child is under the age of 18, they cannot own a property in their name.
However, it can be held in trust until they turn 18, at which point the child will take ownership of the property. There are various trusts that can be used. For example, with a bare trust, another adult holds the title to the property as a nominee until the child turns 18 and can automatically take legal title.
Another option might be a discretionary trust, where trustees have the discretion to decide if and when the child might become entitled to the property.
» MORE: What is a trust?
Do I need a solicitor to transfer property ownership to a child?
It is usually best to seek the assistance of a conveyancing solicitor to make sure the process of transferring the ownership of property to a child runs smoothly. They will ensure the necessary paperwork is in place and take care of the legal side of things.
Given the potential tax implications involved with property transfers, it might also be sensible to talk to a professional financial adviser. They will be best placed to try to ensure your plans are carried out in the most tax-efficient manner and in line with all the relevant rules.
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John Fitzsimons has been writing about finance since 2007. He is the former editor of Mortgage Solutions and loveMONEY and his work has appeared in The Sunday Times, The Mirror, The Sun and Forbes. Read more
Tim draws on 20 years’ experience at Moneyfacts, Virgin Money and Future to pen articles that always put consumers’ interests first. He has particular expertise in mortgages, pensions and savings. Read more