Is there really a ‘seven-year rule’ that allows you to pass on property to your beneficiaries, tax-free?

Many people invest in property to ensure that their children have a home for the future, or a portfolio of properties that generate an income that can support them when their parents move on. 

However, many parents believe they can pass property on to their children, free of inheritance tax, by either buying the property in their children’s name or by signing over ownership to the children and simply living on for another seven years. The origin of this idea comes from the ‘gifting’ rules set out by HMRC. 

Unfortunately the ‘simple’ seven year rule is much more complicated when it comes to investment properties because of the way they are taxed.

Any increase in the value of a property that is not your primary residence (i.e. not the home you live in) is typically subject to Capital Gains Tax, and any rental profit you make from letting it out (rental income less allowable costs) normally attracts income tax. As such, any change of ownership can trigger tax payments to HMRC. 

Secondly, tax is payable on the rent according to the share ownership of the property. If you have three children and you leave a third share to each of them, the tax payable on the rent will be subject to their individual income tax levels.

Thirdly, there could be problems if you fall out with your children, especially if they are married and then get divorced. If the property is simply in their name, it will be included as part of their estate that is assessed in the financial divorce settlement. Again, this might mean that the property - or the wealth within that property - does not end up with the person you intended.

There are some ways via trusts you can minimise the tax you and your children pay on property in the future, but to do this you will need trusts set up by experts in the correct way, which our specialists can help with.