Whether you want to sell your home quickly or simply want to give your child a gift, there is a way that you can sell your house to them for as little as £1.
With houses becoming more expensive, many are struggling to save up enough money for a deposit and are turning to their parents to raise the extra funds required. However, this isn’t the only way that people can purchase their first home. Many parents around the country are selling their properties to their children at a heavily discounted price – with some selling it to them for a mere £1. A tempting sale for both the parents and children, it’s a great way of getting them onto the property ladder.
Although this extraordinary move is technically legal, it’s important to think about the taxes and fees that could be involved in the process. If you are thinking about selling your property to your child, you should consider the following:
Even though in 2017 the government abolished Stamp Duty for any first-time buyers who wanted to purchase properties up to 300,000 for second or third-time buyers it is still a concern.
However, one of the main reasons as to why selling a property to a relative is so tempting is that it will cut out Stamp Duty. In this case, the tax will be calculated directly on the purchase price, with the remaining difference between the market value and purchase price being considered as a gift.
An important factor to remember with gifting your child or relative a property, is that if you pass away in the next 7 years, your relative will have to pay a significant amount of inheritance tax on the property. This is only if the property is worth over £425,000, however. If you do survive for 7 years after the sale, your name will be removed from the estate and your child won’t be liable for IHT (otherwise known as a PET or a ‘potentially exempt transfer’).
Many people have to take out a mortgage when purchasing their home. If you want to sell your property to your relative for lower than the market price with a mortgage still attached to it, you will have to pay it off before transferring the ownership over. Of course, if you have already paid off the mortgage, you can sell the property to them without any mortgage complications.
If after selling your home or gifting it to your children you want to live in the home, you are legally liable to pay rent to them at the market rate. This is to ensure that no inheritance tax is incurred upon death (as long as you live for 7 years or more after the transfer). Your child or relative will then have to pay income tax on the rent that you give them.
If you refuse to give them rent or you pay less than the market rate, the property will still remain in your name and it will be subject to inheritance tax.
Capital Gains Tax
If you are lucky enough to have more than one home and the one you are selling isn’t your main property, you will be liable to pay Capital Gains Tax – no matter who you are selling the property to. The rates of the tax will depend on your Income Tax status – for example, if you pay a higher rate IT, it will be 28%.
The amount of CGT you pay is calculated taking into account the market value of the property – ignoring the discounted amount that you are selling it to your relative for. Therefore, it’s important to consider what the CGT is before you sell to them.
Selling your property to a relative might seem like a viable option. But it’s vital that you consider any tax implications and fees, so that you aren’t completely out of pocket at the end of the process. By selling your house to a family member it will undoubtedly cut down on legal costs and estate agent’s fees, but if it isn’t done correctly, could cause you significantly worse long-term financial issues.
If you need further assistance, reach out to us.