Is it better to inherit or gift a property? Inheritance tax rules and ‘risks’ explained
A property is one of the most valuable things people will own in their lifetime, but it can also be an asset that leads to a sizeable inheritance tax bill for loved ones.
This is becoming increasingly common, as house prices have risen significantly over the last few decades, but the inheritance tax (IHT) threshold has remained unchanged at £325,000 since 2009.
According to the UK House Price Index, the average house price in January 2009 was £152,383. As of March 2023, Rightmove’s House Price Index showed the average asking price in the UK hit a staggering £365,357. This represents an increase of around 139.18 percent.
With HMRC subsequently raking in billions in inheritance tax receipts, many are questioning the most tax-effective route to manage their finances. Express.co.uk spoke to experts to find out the pros and cons of inheriting a property versus gifting one.
UK house prices have increased around 139.18 percent since 2009 when the IHT threshold was last set
Inheriting a property
For those planning to leave a property in their will, it’s important to research the residence nil rate band (RNRB) allowance, which is specific to property.
Heather Pollard, head of underwriting at Tower Street Finance told Express.co.uk: “If you leave your main home to direct descendants, such as children or grandchildren (this includes adopted, foster and stepchildren), then they will benefit from an additional £175,000 onto your tax-free inheritance allowance.”
In theory, Ms Pollard said this means people could leave behind an estate worth £500,000 and their children won’t pay any inheritance tax.
For those who are married and are leaving a ‘joint’ estate to their children, Ms Pollard said: “The threshold increases to £1million. Anything over this rate would be charged at 40 percent.”
That said, Ms Pollard said, “the devil is in the detail”. The residence nil-rate band only counts if a person passes their property onto a direct descendant, and it only covers property that they have lived in – not holiday homes.
Deborah Beal, inheritance tax lawyer at Wright Hassall, added: “Opting to take this route means that the original owner can continue to benefit from the property and control it for the rest of their life.
“It isn’t usually at risk to anyone else’s death, divorce or bankruptcy and when the property is inherited by the chosen person, there’s currently no Capital Gains Tax to pay.”
Gifting a property before you pass away
If the residence nil rate band isn’t going to cover the property, people may consider gifting their property to their children before they die.
Inheritance tax threshold have been frozen since 2009
Ms Pollard said: “You can do this by passing the ownership to them in full, and then either moving out or paying rent to them at market value.”
Ms Beal said: “There are many reasons parents choose to gift a property to grown-up children whilst they are still alive. For some it’s seen as a way to minimise inheritance tax, for others, it makes sense as they have the resources to do so.”
But if a person chooses to gift a property outright, Ms Beal said it means that they will usually lose use and control of it and any income that they’re making on it.
Ms Beal continued: “The benefit of this is that the person no longer has the responsibility of the property and the seven-year clock starts ticking for removing the asset from the person’s estate for inheritance tax purposes.”
The seven-year clock refers to the rule that a person must live for at least seven years after making the gift to ensure no inheritance tax will be charged on it.
Ms Pollard said: “This gift would be known as a potentially exempt transfer or PET. If you were to pass away before the seven years had passed, then inheritance tax (at up to 40 percent) may be applied. The tax rate does drop down after three years though, so there could still be a tax saving to be made.”
There are some further considerations with this option too. One “disadvantage”, according to Ms Beal, is that the property cannot be taken back or used to pay any of the person’s own debts unless it is gifted back to them.
She added: “And there’s a risk involved as if the person receiving it dies, gets divorced or becomes bankrupt, a third party could end up with the property.”
The recipient of the home may also be liable to pay stamp duty if there is a mortgage on the property (on the value of the outstanding loan).
Ms Pollard said the person gifting the property may also be liable to pay capital gains tax too.
However, she said: “This only applies if the property the person is gifting isn’t their main home though.”
For a person who’s happy to give away the benefit of a property but still wishes to exercise some control, Ms Beal said that putting the property into a Trust may be a “suitable alternative”. People can read more about trusts, here.
Ultimately, Ms Beal added: “It’s best to get advice from an expert who can help you scenario plan and discuss what option is best for you.”