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Those born between the years 1946 – 1964 (often referred to as ‘baby boomers’) are set to pass on £2.1 trillion of housing wealth in the coming decade.
According to Savills, those over the age of 65 own £2.1 trillion of housing wealth with £1.9 trillion of this being mortgage-free. The Resolution Foundation believe that inheritances could be set to double in the next two decades and the UK could reach peak inheritance in the 2040s.
Many younger generations have found it difficult to get onto the property ladder so the passing down of properties from ‘baby boomers’ will be very welcome to those who have been left struggling by soaring house prices. However, the Resolution Foundation believes that fewer than 32% of property inheritances will be by way of gift. This means that HMRC will benefit from inheritance tax (IHT) when owners die on the majority of property transfers over the coming years.
What are the current IHT rules?
IHT is charged at 40% on the market value of assets above the tax-free threshold as at the date of death. Everyone has a tax-free ‘nil rate band’ of £325,000 and, for those passing on a residence to a direct relative when they die, there is an additional tax-free ‘residence nil rate band’ of £175,000. Overall, it can be possible to pass on £500,000 of assets tax-free and for married couples or those in a civil partnership it can be £1m in total (provided their total estate when IHT is charged is worth below £2million). Anything left to a spouse or civil partner is completely exempt from IHT.
According to the UK House Price Index, the average house price in the UK is now £294,329 as of December 2022, which sits nicely within the tax-free threshold. However, the average house price in London is £543,099, with many family homes worth in excess of this. HMRC is set to profit hugely from the wealth of ‘baby boomers’ over the next decade unless properties are handed down before the generation passes away.
The tax-free nil rate band has not been reviewed since 2009 and both types are now fixed until 2028, however, property prices have increased substantially. In January 2009, according to the UK House Price Index, the average property price in the UK was £157,234, almost half the average price in 2022.
What can you do to avoid your relatives paying a hefty IHT bill?
In order to mitigate IHT where properties are not being left to a spouse or civil partner, baby boomers have the option to gift their properties during their lifetime. In general terms, if a property is gifted by a parent or grandparent during their life to a child or grandchild, it can be transferred free of IHT, provided that they survive 7 years from the date of the gift. This does run the risk that if the transferor dies within 7 years of the transfer, and the value of their estate exceeds the nil rate band, there will be IHT payable (albeit at a tapered rate after 3 years from the date of the transfer).
The position is more complex if the transferor will still live in or use the property given away, as the IHT planning can be defeated without careful consideration. There are essentially three narrow options in this case:
- Ensure that ongoing use of the property is kept to the absolute minimum;
- Give away a share, retain a share and co-occupy the property with the recipient; and
- Pay a market rent for the use or benefit received.
There are other tax considerations when gifting a property. If there is a mortgage on the property and the property is transferred subject to this, the recipient may be liable to pay Stamp Duty Land Tax on the balance of the unpaid mortgage. There may also be some capital gains tax implications upon transfer if the home is not the transferor’s main residence.
Taking further advice
The rules surrounding gifts of properties are complex and are frequently misunderstood. As highlighted, it may not be the case that simply transferring a property to others will be effective in terms of mitigating IHT, especially where the property gifted is the donor’s home.
We would always recommend taking expert advice when considering a gift of a property; the IHT savings can be considerable, but only if done properly. The formation and implementation of a suitable plan would typically involve the input of both our Real Estate and Private Client Teams.
FURTHER INFORMATION
If you require further advice on your options for the gifting of a property, please contact either:
Bethan Owen and Gemma Mallett in our Real Estate Team, who specialise in property law, including all the issues surrounding a property transfer; or;
Charles Richardson and Lucy Bluck in our Private Client Team, who specialise in IHT and estate planning.
ABOUT THE AUTHOR
Gemma Mallett is an Associate in the Real Estate team specialising in residential property, having joined the firm in November. She deals with transactional matters and has a wide range of residential experience. Gemma has acted for developers, high net worth individuals, corporate investors, overseas buyers (including companies), LPA receivers and Trustees in Bankruptcy.
We welcome views and opinions about the issues raised in this blog. Should you require specific advice in relation to personal circumstances, please use the form on the contact page.
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