Gifting part of a holiday home - some considerations
We’ve recently received a few questions in relation to gifting a family home or a holiday home, in terms of the tax implications and in what circumstances will the gift be effective for inheritance tax (IHT).
It is commonly known that if a main residence is gifted but the donor(s) continue to live in the property without paying a market rent, this can have adverse IHT implications. This is because by continuing to live in the gifted property rent-free, the gift will fall foul of the gift with reservation provisions. While there are other planning options when considering gifting the family home it will always be advisable to seek professional advice.
What about where the gift consists of part of a holiday home? Do the same considerations apply?
Some simple facts…
Brian and Jill own a holiday home in Cornwall on a joint tenancy basis. The property has never been occupied as their main residence nor has it been rented out. Brian and Jill are considering making a gift of 50% (so 25% each) to their two children, Clara and Daniel. Neither Clara nor Daniel own a property of their own.
If part of the holiday home was gifted to Clara and Daniel, this would create a potentially exempt transfer based on the market value of 25% each for inheritance tax purposes. However, if the intention is for Brian and Jill to still be able to use the property, then this type of gift can easily fall foul of the gift with reservation provisions. These rules effectively mean that if an individual continues to use, or benefit from, an asset after they have given it away, then, whilst legally and for tax purposes they have made a gift, the value of the gifted asset remains subject to IHT in their estate.
However, it is possible to avoid the gift with reservation provisions by ensuring that the gift falls within a specific exemption to the IHT rules known as the 'co-ownership exemption'.
Broadly, under these rules, if the donor(s), so Brian and Jill, make a gift to the donee(s), so Clara and Daniel, of a share in a property and both the donors and the donees occupy the property and pay their fair share of expenses then the gift with reservation provisions won’t apply. The point here is that the donor(s) must only receive a negligible benefit – so even if Brian and Jill pay more towards the bills and the upkeep of the property than Clara and Daniel, this will not cause any IHT issues for Brian and Jill because they haven’t derived a benefit.
Helpfully, HMRC has provided some examples (namely example 2) within its manuals which can be found here.
Interestingly, even if a gift successfully avoids the gift with reservation provisions, the gift can be caught by the pre-owned asset tax (POAT) rules and lead to an unwanted annual income tax liability.
Although, here if Brian and Jill gift an equal share of the property to Clara and Daniel and they can all equally occupy the property and pay their fair share of any expenses this would fall within the co-ownership exemption meaning that POAT would not apply.
Capital gains tax
In making the gift of the property Brian and Jill will also be making a disposal for capital gains tax (CGT) based on 25% each of the current market value of the property. This means that they will each be taxable on any capital gain, subject to any available annual exemption in accordance with their rates of tax.
As the property is a holiday home, they would be liable at the higher rates of 18% to the extent that the gain falls within the basic rate threshold and 28% on any amount above. Further they will need to report and pay any CGT within 60 days of the gift being made.
Stamp duty land tax
As Clara and Daniel don’t currently own a property, at the point that they purchase their main residence they will be subject to the stamp duty land tax (SDLT) surcharge of 3%. However, if they already did own a main residence which they replaced, the surcharge will not apply.
Another consideration is that as Clara and Daniel do not already own a property of their own, if they decide to buy a property of their own, the gift will prevent them from qualifying as a first-time buyer.
Finally, if there is a mortgage attached to the property, then depending on the value of the gift and outstanding loan, this could result in SDLT being payable.
What about gifting the whole property?
If Brian and Jill did decide to gift the whole of the property to Clara and Daniel, according to HMRC’s guidance they could only use the property on an ‘occasional’ basis – see the guidance here.
If the intention was to use it more frequently, Brian and Jill could pay a market rent to prevent the gift with reservation provisions applying. This would then mean that Clara and Daniel would be subject to income tax on the rental income and Brian and Jill will incur a higher CGT liability on the gift.
Planning in this area is complex and it is advisable that legal advice is sought prior to taking any action. For the gift to be IHT effective, Brian and Jill would need to survive seven years from the date of the gift. If Clara and Daniel cease to occupy the property, the benefit of the ‘co-ownership exemption’ will be lost. This will mean that the value of the property will be back in Brian and Jill’s respective estates’ for IHT.
Consideration ought to be given to other aspects involved, for example, the property title deeds will need to be amended with land registry and ideally the utility bills should be in the name of the ‘new’ owners.
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