Gifting home to child

martinpaul1991

Looking for some advice and direction....

We have a Small second property (in Scotland) currently rented by tenants with a small mortgage remaining (£17k approx). The property is only worth about £45k. In a bit of an urgent financial situation recently ( tax bill etc), our daughter gave us £25k, and the plan is for our daughter to pay off ‘our’ outstanding mortgage on this property and move in to live, the place needs much work done to it which she is happy to take care of and the current tenant will likely leave soon. We would want to sign this property over to her and there is no rush to do so at either end, keen to do so as cheap and smoothly as possibly. I understand it takes 7 years to do so and I was wondering how to start the process? Capital gains, inheritance tax and any associated admin is something I really can’t seem to grasp.

The only blip we feel we will encounter along the road is that along the line if my daughter decides to move out, she won’t require the monies invested, however if renting it out to other tenants, I’m guessing the rent received has to be declared (and taxable) via us, until we are able to sign the property over to her!?

I hope this all makes sense. Any direction would be lovely :-)

davidmcn

martinpaul1991 wrote: »

I understand it takes 7 years to do so

I think you've misunderstood (or there's something weird going on which you haven't told us about). The only (usual) relevance of 7 years is that's the period prior to the date of death in which lifetime gifts might be taken into account for Inheritance Tax purposes. It's not something which slows down you making the gift. And in this case, it sounds like the only gift is £45k minus (£25k + £17k) = £3k?

It would be a Capital Gains Tax disposal for your purposes (at the current market value), so you'd need to figure out what if anything is due (probably not much).

If daughter hasn't previously owned a property, she should bear in mind this would use up her first time buyer "virginity" (for LBTT relief etc) which she might prefer to keep for a more expensive future property.

G_M

1) so daughter gave you £25K and will pay off £17K mortgage. You will 'owe' her £42K.

2) These are gifts. If she were to die within 7 years, the £42K would be included in her Estate when assessing Inheritance Tax (with some annual adjustments over the 7 years).

3) The property is worth £45K and is mortgage free.

4) You can transfer the property to her at any time, either with or without the current tenants. I'm unsure of the process in Scotland (someone will know or use google). In England not hard or expensive to DIY

5) If the tenants are still there, she'll become theirnew landlord. Again, I'm not sure of Scottish tenancy law, so check what happens when a landlord sells to another LL

6) when you transfer the property, you'll be liable for Capital Gains Tax. Any increase in value between the price you originally paid and £45K, less your annual allowance of £12,000. CGT is at 18 or 28% depending on your income.

7) will she pay you the £3K when you give her the property? ie the difference between the £42K and £45K? This would not be a gift, it would be a 'sale'. But if she did not give you the £3K it would be a gift and be added in for IHT - see 2 above

8) if she keeps the current tenants, or they leave, she moves in, she moves out and new tenants move in, then the rent will be her income and subject to her declaring it for income tax

9) asuming this plan is firm and agreed by all parties (I'm guessing you own the property jointly with a spouse/partner?), I see no reason to wait before transferring the property (unless she does not want to be a landlord and prefers to wait for the current tenants to leave).

martinpaul1991

Thanks, this is very helpful! I clearly had an incorrect idea as to how inheritance tax works. Is it simply me who needs to involve a solicitor to transfer the property deeds over to her? In terms of CGT, it will clearly be very little based on the value of the property.

She will not pay me the additional 3-8k the property is likely worth no. Do we need to declare that ‘gift’ element or is it a case of if I pass in this next 7 years, this is included in my estate in terms of inheritance tax purely based on statements etc. Should we get anything in writing? She has already sent me the 25k a few months ago and looking to settle the mortgage and move in in the next few months. I guess it makes sense to transfer the property immediately before she renovates it thus adding value? Keen to transfer as cheaply as possible to both parties, especially with the value being so little.

Bossypants

martinpaul1991 wrote: »

the place needs much work done to it which she is happy to take care of

She may think she will be happy to do it, but in my experience FTBs are prone to biting off more than they can chew, simply because they don't realise how much the work really costs (both financially and in terms time and stress/upheaval).

Since you already own the property, would it be an idea to let her live in it rent-free for 6 months or so, so that she can get a sense of what it's really going to be like (and get some quotes for the things she can't do herself) before she commits herself and sacrifices her FTB 'virginity'?

davidmcn

You have an annual allowance of £3k for lifetime gifts anyway so if that's the only significant gift in the year it's not going to be relevant for IHT purposes. Given you appear to be short of cash are you even in IHT territory anyway?

theartfullodger

G_M wrote: »

1)...................
5) If the tenants are still there, she'll become theirnew landlord. Again, I'm not sure of Scottish tenancy law, so check what happens when a landlord sells to another LL.................

The Scottish "Leases Act 1449": Still operates, my favourite Scottish law

http://www.legislation.gov.uk/aosp/1449/6/contents

Item it is ordanit for the sauftie and fauour of the pure pepil that labouris the grunde that thai and al vthiris that has takyn or sal tak landis in tym to c;u;m fra lordis and has termes and yeris thereof that suppose the lordis sel or analy thai landis that the takaris sall remayn with thare takis on to the ische of thare termes quhais handis at euir thai landis c;u;m to for sic lik male as thai tuk thaim of befoir . . .

- I think that's self explanatory...

";"'s added to avoid MSE censor..

The new owner becomes the new landlord, tenancy continues.

G_M

martinpaul1991 wrote: »

Thanks, this is very helpful! I clearly had an incorrect idea as to how inheritance tax works. Is it simply me who needs to involve a solicitor to transfer the property deeds over to her?
You may, both, be able to DIY. In England it simply requires 3 forms sent to the Land Registry. However the Scottish LR is separate and may have different forms and processes.
If you use a solicitor, they may insist she uses one too - conflict of interest for them to act for both buyer/recipient and seller/donor.

In terms of CGT, it will clearly be very little based on the value of the property. Yes, and the first £12K is exempt (unless you've used your CGT allowance elsewhere eg selling shares)

She will not pay me the additional 3-8k the property is likely worth no. Do we need to declare that ‘gift’ element or is it a case of if I pass in this next 7 years, this is included in my estate in terms of inheritance tax purely based on statements etc. Should we get anything in writing?
It will make life easier for your Executers if there is something in writing.Write a simple note, sign, and keep with your will.
List the 3 gifts, amounts, and dates along with who to and from.

She has already sent me the 25k a few months ago and looking to settle the mortgage and move in in the next few months. I guess it makes sense to transfer the property immediately before she renovates it thus adding value? Keen to transfer as cheaply as possible to both parties, especially with the value being so little.

If no one here knows the Scottish conveyancing process (David? Artful?) do some googling.

martinpaul1991

She is happy to do the work, and has the means! First time buyer and she is giving up any benefits there but happy to do so to be mortgage free and pick this property up at a good price.

I suspect we will be in the IHT category, it was an unexpected bill and we always planned to offload the property to one of our kids, it’s just came about very fast.

Is there a cheaper process than us both retaining separate solicitors to transfer the deeds? Because of the low value of the property and the good faith we have in each other, we are keen to transfer as cheaply as possible, where possible.

In terms of the CGT amount and the gift element, we won’t have used out 12k allowance. The gift element may be upto 10-15k max based on valuation (ie. 25k given plus 17k to clear mortgage but house is valued at 55k max in current state), I guess we will need to get it valued by a solicitor before the current tenants move out in its current state before any improvements are carried out by daughter.

Apologies for the lack of understanding. It’s new territory for both of us. Thanks for the help and direction thus far

martinpaul1991

....just a thought, would it be cheaper when we factor in the cost of us both retaining a solicitor, and with this property only being worth approx 50k, if in good faith I just officially gift this property to my daughter and don’t make reference to the monies she had sent me (or will use to settle the small mortgage), obviously there is an element of risk there on her part re. IHT however we are still young and I can make verbal allowances to the other children should something happen to me. I guess even just transferring the deeds involves a solicitor?

theartfullodger

Sounds like fraud?


Just in case things go wrong later get it all documented:. Families have break ups