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Did your family lockdown largesse create a tax charge?

Did your family lockdown largesse create a tax charge?

As the last lockdown is slowly eased and more and more of the population are vaccinated, the multi-generational living that sprung up as a result of the initial Covid City Escape is coming to an end.  It would be interesting to see how many families, whilst sitting out the pandemic in the rosy glow of family dinners, decided to do some estate planning.  Perhaps gifting a property or rental income to family members. 

Whilst it would seem a convenient way to reduce any inheritance tax liability such gifts can be complex and create unforeseen tax charges.

Normally gifts are exempt from inheritance tax provided the donor survives for seven years after making the gift.  Where the donor, a father, gifts a house to a family member, his son, and the father continues to benefit from the property in some way (either from rental income or by continuing occupation) the entire property could be treated as remaining in the father’s estate for inheritance tax purposes as the father has reserved a benefit to himself.

The reservation of benefit can be avoided however, if for example the father and son live in the property together and equally share all out-goings, expenses and maintenance costs, this may have been convenient in lockdown but is it feasible in the long term?

The reservation can also be avoided if full market rent is paid from the father to the son for their continued occupation. However, in this scenario, the rent paid must be the true market rate, there must be a lease or tenancy in place and the rent must be reviewed and kept up to date.  In turn this may create an income tax complication for the son.

If the father does not survive for seven years the son may also have to pay inheritance tax on the gift of the property.  If the son does not survive the father may end up sharing his property with the beneficiaries of his son’s estate.

There may also be a capital gains tax charge on the gift of property.  Whilst you can transfer a property between spouses or civil partners without incurring a capital gains tax charge (as long as they are not separated and are living together in that tax year) if that spouse or partner then sells the property there will be a capital gains tax charge on any gain that they have made (over the available personal allowance).

If the father passes his main residence to his son, private residence relief should be available if the property has been the main residence of the father for the time he has owned it.  However, the father should beware that gifting the family home to his son means that he will no longer have rights to the home and the rosy glow of lockdown living may well turn cold.

As for stamp duty land tax, it will be payable if the transfer of the property is subject to a mortgage but otherwise will not apply.

To avoid the pitfalls of lockdown largesse, we recommend approaching your estate planning with care and enlisting professional advice. If you wish to discuss any aspect of estate planning further, please get in contact with our Catherine Pugsley or Andrew Grant.