For a variety of reasons, you might consider gifting your home in your lifetime. But this is not a step to take lightly. What at first may seem like a great idea can be fraught with pitfalls and problems.
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A deed of gift, sometimes referred to as a transfer by way of gift, describes a situation where the owner of property entirely relinquishes ownership of it to another person for no ‘valuable consideration’. This means that no form of payment is made, whether by money, transfer of assets, assumption of debt, or even in exchange for services.
To be a true gift, the owner must make the transfer entirely of their own free will. So, if it’s made under duress or as a result of an order of the court, it’s not a true gift.
Deed of Gift vs Transfer of Equity
A deed of gift should not be confused with:
- a transfer of equity, where at least one of the owners remains on the title; or
- an assent, where the ownership of property from the estate of someone who has died, is transferred into the new owner’s name.
Why make a deed of gift?
Often, a deed of gift is made either to provide a child with an early inheritance and/or with a view to mitigating Inheritance Tax (IHT) liability on the parent’s estate when they die. Sometimes, a property is gifted from one spouse to another, perhaps to protect the recipient’s rights in the matrimonial home.
Tax implications of a deed of gift
It’s important to understand that a deed of gift can have significant tax implications, and you should not proceed without seeking professional advice.
How do I gift my property?
While there is no absolute requirement to instruct a solicitor, most people wishing to make a deed of gift choose to do so. We particularly recommend taking advice if the property is unregistered, ie there has never been an application to register the property at the Land registry.
For registered property, Official Copies of the register are obtained from the Land Registry to check:
- the current ownership status; and
- whether there is a mortgage or other debt secured on it.
If a debt is secured on the property, it must usually be repaid before the property can be gifted.
Subject to those checks, a transfer of registered title form (TR1) must be completed, signed and witnessed. An application (using Form AP1) must then be made to the Land Registry to register the transfer. The name(s) in the ‘Proprietorship Register’ will then be changed to the new owner(s). If you are not represented by a solicitor, you must also verify your identity to the Land Registry by submitting Form ID1, which must be signed by a solicitor.
Gifting property is not an effective way of putting it beyond the reach of your creditors. If a property is transferred for less than its market value – which is clearly the case with a deed of gift – the official receiver or trustee in bankruptcy may be able to reverse the transaction if:
- the transferor becomes bankrupt within five years of the transfer; and
- it’s considered that the intention of the transfer was to place the property beyond the reach of creditors.
If the transfer was to a spouse, civil partner or family member, that is only likely to strengthen the case against the transferor.
Can I continue living in the property once it’s been gifted?
The simple answer is yes, you can continue to live in the property, BUT…problems can arise.
Let’s consider the typical example of a parent gifting their home to a child with the intention that, if the parent survives for more than seven years, their estate can avoid paying IHT on it. In most cases, the parent will wish to ensure they have the right to continue living there.
One possibility is that the child can grant the parent a lease for life, which the law automatically converts to a 90 year lease, terminable on the death of the tenant (parent). While that may sound the perfect solution, it comes with a significant Achilles heel for the parent. Such a lease is an ‘equitable interest’, which means that it will be ‘overreached’ by a sale of the property by trustees. This means that if for whatever reason, the child subsequently decides to sell the property (and if they are the sole owner, they can do this by appointing a second trustee for that purpose), the parent must vacate.
Alternatively, the child can grant the parent a lease for a fixed term of years. That fixed-term lease protects the parent as it will survive a sale of the property by the child. However, it will also survive the death of the parent and will then have value for IHT purposes. The exact value will depend on the number of years the lease has left to run. This means that before granting such a lease, it’s necessary to estimate how long the parent will survive. Underestimate, and the lease will expire before the death of the parent. Significantly overestimate, and there may be IHT consequences.
These issues amply illustrate the importance of taking expert legal advice before taking any steps towards gifting your property.