Splitting & Gifting A Property

trickydicky802

We wish to gift part of our house to our son to reduce our total assets and reduce our future IHT liability. We also wish to avoid any 'gift with reservation' issues.


Situation:
We own a large detatched house that is already divided into two self contained dwellings, each with its own front door, bathroom(s), kitchen, etc. Lets call them 'house' and 'cottage'.
House and cottage have had separate council tax bands for around 20+ years (since before our ownership)

House and Cottage have had their own separate address in the Post Office Address File (since before our ownership)
House and cottage have a single LR title in our joint names. We have no mortgage.


We would like to split the house and cottage into two separate titles, effectively making two semi-detatched dwellings. No building works would be necessary.


We would then gift the cottage to our only son as a PET, hoping to survive the necessary seven years. We would eventually leave him the house in our will.



Questions:
1.Can the existing single title be split into two titles and what are the implications, if any?
2.Since the cottage would now be a completely separate legal entity in which we have no interest or control over, would this gift avoid any 'gift with reservation' issues as it would simply be a legally separate 'dwelling next door'?


Thankyou

Tom99

Assuming there is no mortgage and the house/land can be split vertically with a party wall running all the way through the property then splitting the legal title into two should not prove difficult.
You would transfer part of your freehold title to your son, using form TP1 plus some other forms I think though I would suggest you use a solicitor to make sure everything is done correctly.
You will need a suitable plan of the land you are dividing.
A couple of other things to check:
- The planning situation. Would planning consent be require to complete separate the two dwellings. Do they interconnect in anyway at the moment.
- Would the disposal be subject to CGT? Since you say there are already two Council Tax bands it is clearly seen from that perspective as two dwellings and therefore maybe only one of them can have been your main residence for CGT purposes.

da_rule

As long as you don’t retain any right to use the cottage without paying a market rent then you’re set when it comes to gift with reservation of benefit issues.

I also assume you’re both fit and healthy so there’s no concern regarding deprivation of assets in relation to possible care needs?

Operationally, all you need is a transfer deed (TP1), and a properly drawn out plan showing the extent of the land to be transferred. I assume you’ll be giving them some garden land as well etc. You may need to think about what, if any, rights you need to grant each other. Are there any pipes, shared utilities, gutters/down pipes etc that run under, over or on the other property that you/they may need a right to access? If so, you’ll need to make sure that appropriate easements are in place.

CGT may be an issue. If the property really is two separate properties then it is difficult to see how you could have occupied both as you main residence so you may need some specialist advice on this.

Finally, have you thought how you’ll feel about seeing the property used by others? If your son isn’t going to live there then how would you feel about him selling it or renting it out to people who may then damage it etc? If your son does intend to sell it, it may be easier for you to sell it then just gift him the cash.

davidmcn

Does your son want the house? If so, what does he plan to do with it?

AdrianC

da_rule wrote: »

Finally, have you thought how you’ll feel about seeing the property used by others? If your son isn’t going to live there then how would you feel about him selling it or renting it out to people who may then damage it etc? If your son does intend to sell it, it may be easier for you to sell it then just gift him the cash.

This is the big red flag for me, too.

Will your son be living next door? Is it his "lifetime home", at least until you pop your clogs and he gets access to the main place? Does he have no ambition over a family, career, travel that may see him wanting to be elsewhere, either in a different area or a bigger property?

Unless all of those are absolutely unequivocally true, you're setting yourself up for issues. Even if he rents it out to the proverbial Nice Mrs Miggins From The Village (with her cat), or wants to use it as his weekend place, what if he hits financial woes? Or, heaven forfend, predeceases you? Any future sale may not be his choice.

If you really are currently young, fit and healthy enough for (what you freely admit to be) your IHT/DoA motives not to be blatant in the event of your deaths or needing care, then we could be talking about a situation that'll persist for several decades as you gradually reach a position where it's less tolerable to you.

Keep_pedalling

Would this be your son’s home after it is gifted to him? If not why not sell and gift him the proceeds instead?

Not many people want to become accidental landlords, and gifting property rather than cash could lead to a future CGT issue for him and if he is not already on the property ladder then he will be paying more stamp duty when he does buy a place if his own.

Whether you end up gifting cash or property you can cover any IHT payable in the event of your early demise on the PET gift through a cheep term insurance policy.

trickydicky802

Thanks for the interesting comments. It sounds as if the basic process of splitting the house into two separately legal properties is not a big issue as such, and I take on board the comments about using solicitors to draw up new deeds etc and to sort out any necessary wayleave issues.


The possible future consequences are potentially more complex, possibly contentious - some of which I've thought about but some comments have raised things I'd not thought about so thanks for that.


Firstly, possible CGT liability. I'd be surprised if splitting the property gave rise to CGT for three main reasons: 1) there is currently internal doorway access between house and cottage, so I've had free reign throughout the property and all service bills are in my name, 2) my dependent parents have been living in the cottage for the past 10+ years, effectively sharing our home and 3) I don't understand how gifting something can be classed as a capital gain. I will certainly not make any financial gain by gifting it away.


My son already has his own flat, so the gift is simply that, an early gift of part of our estate he will eventually inherit anyway (all things being equal of course!). He will not move into the cottage because my parents (mid-80s) hope to live out their lives there. I'm aware that they currently have no legal tenure so I'd want to address that during any split - I'm thinking of something like a lifetime tenancy so they could not be evicted by my son for any reason. Again, something for a solicitor to sort out.


Longer term (and yes, I appreciate plans can change), my son wishes to eventually move into the house as his 'lifetime home'. Once scenario could be that when my parents die and my wife and I are decrepit (currently in our early 60s), we could move out of the house and into the cottage, with my son moving into the house. Eventually he will inherit the house, thus owning both the house and cottage, as we do now - except they will be legally two properties.


As for the possibility of son selling the cottage, firstly my parents will be sitting tenants paying no rent, so that will make it an unattractive proposition, secondly even after my parent die, it will be a fairly unattractive property because my intention is to not include any land or garden with it, only the right to pass over our exiting driveway for access. I may not even make provision for car parking, to make the property even more unattractive on the open market.


Furthermore, the house will also become a less attractive property as although it sits in a few acres it would technically become a 'semi', which I anticipate would significantly reduce its market value - something that would also help with future IHT liability. However, if both properties were in the same ownership then such considerations would not apply - which would be the case after we die and our son inherits the house to accompany his already gifted cottage.


As for future CGT liability for my son if he does eventually decide to sell the cottage, would there be any liability if he did move back into the cottage for a period of time as his main home? I think I've read that after six months or so of living in a property as a main residence then there is no CGT arising on a sale.


Actually, that does raise another question. If someone buys or owns both halves of a semi-detached property and keeps them separate, can they claim that BOTH properties form their main residence onthe basis that they are effectively using both properties as one? Hmm.


And one final question: at present house and cottage have an interconnecting internal door. It can of course be locked from both sides but is this sufficient to allow the split? I'm thinking in purely legal terms. I realise that an interconnecting door between two semi-detached properties would be an unattractive feature as far as the open market is concerned, but in my scenario where both halves are owned by within a family that would be a positive advantage!


Thanks again for all the comments and suggestions.

getmore4less

Parents live there and you may move back in.

Check pre owned assets.

That covers this attempt to offload something trying to avoid gift with reservation.


Gifts are disposal for CGT purposes, not your main residence since others are living there.

Mojisola

getmore4less wrote: »

Gifts are disposal for CGT purposes, not your main residence since others are living there.

And your son will be building up a CGT bill while his grandparents continue to live in the cottage (and that will continue if you move into it after they are gone).

Tom99

trickydicky802 wrote: »

3) I don't understand how gifting something can be classed as a capital gain. I will certainly not make any financial gain by gifting it away.

You and your son are termed 'connected parties' HMRC assumes any transaction between you is not at arms length and therefore for CGT purposes you substitute market value for whatever price is actually paid.

da_rule

So you would expect your son to take on being a landlord by gifting him a property with sitting tenants with seemingly no formal tenancy agreement in place and paying no rent. Doesn’t sound overly attractive to me.

The internal door is also a new fact. I assume this will be bricked up if you do gift the property so that you don’t have free reign over it anymore.