Gifting a second home to an individual
You might be thinking about transferring your second home to your children or other loved ones. However, there are tax considerations that you may need to be aware of before transferring:
Capital Gains Tax
In the world of taxes, gifting someone your second home is treated as a “disposal” for Capital Gains Tax (CGT) purposes.
This means whether you’re gifting the entire home, selling it at a reduced price or selling it at full price, you might owe taxes on any increase in the property’s value since you first bought it. For example:
- You bought your second home for £100,000 and now it’s worth £500,000. If you gift it, the government expects you to pay CGT on the £400,000 gain. CGT can be up to 24%, which means you could be looking at a bill for about £72,000 (though allowances and deductions are potentially available).
Private Residence Relief (PRR) or Letting Relief, don’t usually apply to second homes, unless they’ve been your main residence.
Inheritance Tax
Inheritance Tax (IHT) is a tax on your estate, mainly on death but also during your lifetime.
Gifting your second home might seem like a way to avoid IHT, but there are rules involved. If you die within seven years of making the gift, the property’s value is still considered part of your estate when calculating IHT.
IHT is 40% on the value above your £325,000 threshold (though additional allowances may be available depending on your circumstances and estate planning strategies)
However, if you make it past the three-year mark after the gift, you might get a little relief in the form of taper relief. This reduces the IHT due depending on how long you survive after the gift.
Gifting a second home to a trust
Trusts are often a great way to control who gets the property after your passing, but they come with their own set of complexities.
Discretionary trusts
If you place your second home in a discretionary trust you get to decide who benefits from the property (perhaps your children). However, you’ll still face a CGT bill when you transfer the home to the trust. And in some cases, if the trust sells the property, it could be subject to CGT as well.
Inheritance Tax
One of the main benefits of using a trust is that it can help reduce the amount of inheritance tax due upon your death. But if you retain certain benefits (such as the right to use the property yourself), the value of the property may still be included in your estate for IHT purposes
In any event, if you die within seven years of transferring the property into the trust, the value of the second home may still be counted as part of your estate and be subject to IHT.
Furthermore, if you set up a discretionary trust, it can be subject to an immediate tax charge of 20% if the value of the home is above £325,000, as well as periodic IHT charges every ten years.
Capital Gains Tax
Just like gifting to an individual, gifting a property to a trust is also considered a “disposal” for CGT. So, you may owe tax on any capital gain, and this time, it could be the trust that takes on the responsibility for future CGT if the property is sold.
Conclusion
While gifting a second home to an individual or trust can be a way to pass on a cherished asset, it’s important to understand the tax implications as these can quickly add up. It is advisable to seek legal advice to help you navigate the best estate planning options to ensure there are no tax surprises for you and your family.
If you wish to discuss tax on a second home or your estate planning options, please get in touch with Ben Tyer or a member of our estate planning team.
Gifting a second home to an individual
You might be thinking about transferring your second home to your children or other loved ones. However, there are tax considerations that you may need to be aware of before transferring:
Capital Gains Tax
In the world of taxes, gifting someone your second home is treated as a “disposal” for Capital Gains Tax (CGT) purposes.
This means whether you’re gifting the entire home, selling it at a reduced price or selling it at full price, you might owe taxes on any increase in the property’s value since you first bought it. For example:
- You bought your second home for £100,000 and now it’s worth £500,000. If you gift it, the government expects you to pay CGT on the £400,000 gain. CGT can be up to 24%, which means you could be looking at a bill for about £72,000 (though allowances and deductions are potentially available).
Private Residence Relief (PRR) or Letting Relief, don’t usually apply to second homes, unless they’ve been your main residence.
Inheritance Tax
Inheritance Tax (IHT) is a tax on your estate, mainly on death but also during your lifetime.
Gifting your second home might seem like a way to avoid IHT, but there are rules involved. If you die within seven years of making the gift, the property’s value is still considered part of your estate when calculating IHT.
IHT is 40% on the value above your £325,000 threshold (though additional allowances may be available depending on your circumstances and estate planning strategies)
However, if you make it past the three-year mark after the gift, you might get a little relief in the form of taper relief. This reduces the IHT due depending on how long you survive after the gift.
Gifting a second home to a trust
Trusts are often a great way to control who gets the property after your passing, but they come with their own set of complexities.
Discretionary trusts
If you place your second home in a discretionary trust you get to decide who benefits from the property (perhaps your children). However, you’ll still face a CGT bill when you transfer the home to the trust. And in some cases, if the trust sells the property, it could be subject to CGT as well.
Inheritance Tax
One of the main benefits of using a trust is that it can help reduce the amount of inheritance tax due upon your death. But if you retain certain benefits (such as the right to use the property yourself), the value of the property may still be included in your estate for IHT purposes
In any event, if you die within seven years of transferring the property into the trust, the value of the second home may still be counted as part of your estate and be subject to IHT.
Furthermore, if you set up a discretionary trust, it can be subject to an immediate tax charge of 20% if the value of the home is above £325,000, as well as periodic IHT charges every ten years.
Capital Gains Tax
Just like gifting to an individual, gifting a property to a trust is also considered a “disposal” for CGT. So, you may owe tax on any capital gain, and this time, it could be the trust that takes on the responsibility for future CGT if the property is sold.
Conclusion
While gifting a second home to an individual or trust can be a way to pass on a cherished asset, it’s important to understand the tax implications as these can quickly add up. It is advisable to seek legal advice to help you navigate the best estate planning options to ensure there are no tax surprises for you and your family.
If you wish to discuss tax on a second home or your estate planning options, please get in touch with Ben Tyer or a member of our estate planning team.