Families rush to give gifts before the budget

Parents and grandparents rush to transfer property, cash and investment before the budget in October. Lawyers report a rise in large gifts made by families who are convinced that the government is going to target capital gains (CGT) or inheritance tax (IHT), to help plug the multi-billion-pound gap in the public finances.

Amid fears that tax changes will take effect immediately on October 30, people are rushing to transfer their assets, including second homes and buy-to-let property, farmland, businesses or cash. It can take three to four weeks for a simple property transfer. Time is running out. The CGT is imposed on profits from the sale or transfer of any property, including your primary home. It also applies to businesses and shares. It is also calculated based on the increase in value of an asset since it was purchased by the person who is donating it. The tax rates paid by an asset donor are dependent on the type and rate of income tax. Many fear that these will be increased in the budget.

IHT is levied on your estate after you die. You get a £325,000 allowance at the moment (£500,000 in the case of a family house left to a descendant and a value less than £2,000,000) and anything above this is subject to 40% IHT. If you make large gifts seven years before your death, they can be tax-free. Couples can leave up to £1,000,000 tax-free to their spouses or civil partners.

Fiona Higgott, a lawyer at Thomson Snell & Passmore in Kent, said that the property department was overwhelmed by clients who were giving their homes to their children and grandchildren. There has been a rush to get things done before the budget. She said that these people were planning to give away their property and had moved forward with the plans in order to avoid a possible tax increase next month.

Labour has pledged not to increase taxes on the “working people”, and ruled out changes to income tax and VAT. The government has left open the possibility of a tax raid on taxes seen to be paid by the rich, such as CGT and IHT.

Taxpayers at the basic rate pay CGT of 10 percent on most assets, and 18 percent on residential property gains. Taxpayers with higher and additional rates pay 20% on the majority of assets and 24% on real estate. Rachel Reeves reportedly considers raising rates to match income tax. This would result in higher-rate taxpayers paying 40 and 45 percent on their profits. The CGT allowance is £3,300 for everyone, but it has been reduced over the last two years. It was £12300 in the tax year 2022-23.

Higgott stated that a client was rushing to give her grandchildren a property for buy-to let in order to avoid an increase of up to £40,000 on her CGT bill. The widow made a gain of £250,000 on her property worth £600,000. She wanted to gift the rental-generating house to her grandchildren, who had lower tax rates than she did, because her children were higher rate taxpayers. She was a higher rate taxpayer and had no remaining allowance of £3,000 per year. This meant that she was taxed 24 percent on the £250,000 profit.

If she had sold before the chancellor aligned CGT with income taxes in the budget, her CGT would have been 40%, which would have meant that her tax bill could be at least £100,000.

Higgott added: “We also see business owners accelerate plans to give shares of their company to their children, and farmers make significant gifts to the future generation in case IHT reliefs are diluted.”

Fear that a change is imminent fuels the urgency. The former chancellor George Osborne raised the CGT rate for higher-rate and additional-rate tax payers from 18% to 28% in June 2010. This increase came into effect at midnight on the budget day. Taxpayers have little time to sell assets or give them away, so if they are not notified in advance of an increase, the revenue will be higher. Jo Summers, a lawyer at Jurit LLP, said: “We definitely see an increase in the number of people who try to give properties away before the budget. IHT was a concern for many people before Labour became the government. But now, it is at a fever pitch.

Our clients are convinced CGT and IHT will increase and many are concerned that it will happen immediately, and not in the new fiscal year in April. It can take three to four weeks to transfer a property. However, it depends on the circumstances of the gift and how complex the gift is. Higgott says that anyone who is not yet in the process but hopes to finish it by the budget date of five weeks is not being realistic.

When giving away a house, you’ll need to get it appraised for CGT purposes. This will be crucial in case HM Revenue & Customs challenges your decision. Some are having difficulty getting a valuation completed quickly due to the surge in demand. We suggest that you get the property appraised before gifting it. It may be worth much more than you thought and you could end up with a larger CGT bill later than planned. Higgott advised that it is best to have a Royal Institute of Chartered Surveyors-registered surveyor do a “redbook” valuation.

It is best to use professional tax calculations. HMRC will be more inclined to contest a value produced by two estate agencies.”

If you are pressed for time, the process can be split into two phases to make sure that you benefit from current tax laws. Tax purposes will count the transfer of the beneficial interest in a property to the new owner as a gift as long as it is done by October 30. Use a deed to assign, a legal document that transfers rights. This is faster than transferring the entire property.

Higgott explained that the second step would be the transfer of the legal title. This could be done following the budget. You should consult a professional for advice.

The seven-year rule is one of the best IHT reliefs. It allows for certain gifts to be tax-free as long as the donor lives at least seven more years after the gift. If they die in the next three years, their gift is included in their estate and taxed at 40%. If they pass away between three and seven year later, the tax is calculated on a sliding basis from 32 to 8% depending on their death date.

Alexa Collis, a lawyer at Harbottle & Lewis, said that many clients are making gifts to begin the seven-year countdown in case the relief is abolished in the budget or the rule of seven years extended. I would be surprised if Chancellor made any retrospective changes to the 7-year rule, which is why people are giving gifts now. Collis stressed that it was important to not rush into making these decisions. It’s a big deal to pass a lot of money on to your adult children. This is especially true for those who are in their 20s. Tax changes have not yet been confirmed. “Don’t let tax wag the dog.”

She told me that one client gave £1 million to their children in cash, which would be exempt from their estate tax and IHT as long as they survived for seven years. This could save them up to £400,000.

If you are likely to need to pay for significant medical costs in later life, you should be sure you won’t need the asset in the future.

Rushing to make a gift increases your risk of falling into one of many traps that can land you in a tax bill. It is important to consult a professional before you give a gift of property. The process is complex and requires more than just making the donation and waiting seven years.

Higgott stated: “We’ve been assisting clients who had some pretty chunky gains in the property they were giving away. This is where you should be cautious. When you pass away, any gains are wiped out, and the property is reset. However, if you give it to your children during your lifetime, this valuable tax relief is lost.

It is crucial to get advice and consider your options when a large gain is involved. If you give the property away during your lifetime, there is a chance that you will trigger a large CGT bill and die within seven-years, at which point IHT may also be due. The CGT rule that applies to death means you will only pay IHT if you leave the property in your estate plan.

It is common to believe that the family home is the most valuable asset of an estate. However, it is not true. Parents can continue to live in their property even after they transfer ownership to their children. This will reduce their IHT liability.

HMRC would view this as a “gift without reservation”, in which the donor still benefits from the asset that they have donated. Even if the donor lived another seven years, their property would still be considered part of their estate.

In order to avoid this, parents who want to live in their family home must pay the market rent to the person they have given the property. Taxman will want to see the rental agreement signed by both parties, which specifies an annual review of rent and payment proof that matches similar properties in that area.

Giving your home away while still living in it is a big decision. It involves trusting that the new owner will not sell the property. The property could be put into a trust to mitigate this risk. However, it comes with administrative costs and complexity.