Property Presents; Unwrapping The Legal Surprises When Gifting Property Or Property Deposits
As the next generation of property owners struggle, more and more parents, grandparents and family members are making gifts to secure a first purchase for the younger generation. The help can be by providing a gifted deposit or gifting the property itself.
This article will consider the key factors which those making the gift (“the Donors”) should consider.
Gifted Deposits
Donors must understand that the deposit they are providing is a gift, and not a loan. The deposit cannot be recalled in the future and donors cannot ask for repayment or interest. This is especially important if the person receiving the gift (“the Donee”) is purchasing with a partner. If the relationship with the partner breaks down, the Donor has no claim over the deposit. During the purchase process, the Donor will need to adhere to the conveyancer’s requirements for due diligence and anti-money laundering procedures. The conveyancer acting for the purchaser will need to undertake additional source of funds and source of wealth checks against the Donor(s) to mitigate the risk of money laundering. It is important that funds are not being used to disguise assets or for other illicit purposes.
It is also important for the conveyancer acting for the purchasers to document the intentions of the Donors behind the gift and conduct a thorough due diligence to ensure compliance with legal and regulatory requirements.
The Donor should provide a gifted-deposit letter, to evidence that the deposit is in fact a gift and not a loan. The Donee’s mortgage lender may have their own requirements when dealing with gifted deposit and may need to undertake additional checks. Donees should disclose the gift to their lender early on to avoid delay, preferably when they are arranging the mortgage with the lender or broker.
There are tax implications for gifting deposits and the gift may affect your Capital Gains Tax and Stamp Duty liability. It may also affect the Inheritance Tax paid on your estate. Donors should seek separate tax advice before making any gifts. Conveyancers are not tax experts and are unlikely to advise Donors, who should instruct a separate specialist solicitor or accountant.
Gifting Properties
Many see gifting property to their children or grandchildren as a means of reducing Inheritance Tax or protecting the property from having to be sold to fund care home costs. When a property is gifted, it is important to understand the implications of the “reservation of benefit” rules. Gifts with reservation of benefit are subject to the seven-year rule for inheritance tax purposes. If the Donor survives for seven years after making the gift, it becomes exempt from inheritance tax. However, if the Donor retains any benefit from the gifted property, it may be subject to inheritance tax. A ‘reservation of benefit’ may occur if the Donor continues to live at the property (without any legal agreement such as a tenancy) or continues to receive rent. Donors should seek specialist tax advice to fully understand the implications of gifting properties.
If there are multiple Donors, there is a possibility of a potential conflict of interest, especially if the gift aims to prevent the home’s value from being taken into account for means testing care home fees. In such cases, you should seek specific advice regarding the deprivation of assets.
If the Donor is considering gifting their property, Donors must consider the effect on their standard of living by the loss of the property and appreciate that the property could be subject to divorce proceedings or bankruptcy once in the hands of the Donee.
When gifting a property, consideration should be given to capital gains tax, especially if the property is a rental property or second home.
There may be implications for the Donee when they come to sell the property, as the gift will be construed as ‘a transaction at undervalue’. These cause concern, as it could imply that the Donor was attempting to hide assets, for example, to avoid bankruptcy. Accordingly, when the Donee comes to sell the property, they may be asked to put in place an indemnity policy and the Donor may be asked to produce a statement to confirm that they were solvent when the gift was made.
Stamp Duty is becoming an increasingly complex area. Stamp Duty may be payable by the Donee even if they are not paying anything for the property. It is best to ensure both the Donee and Donor receive tax advice before beginning the transaction.
If, for example, a property is being gifted to one child but there are other siblings, it is important for the Donor to make their wishes clear. Donors should instruct their own legal advisor to ensure that no one can dispute the gift in the future. The advisor will particularly check to ensure the Donee does not have undue influence over the Donor and that the Donor has capacity and understanding of the implications of gifting the property.
Before making the gifts, both donors and donees should seek legal and tax advice, as gifting deposits and gifting properties are not as straightforward. Both Donors and Donees should engage with conveyancers, brokers and lenders early in the transaction to prevent delays to the purchase transaction.
