The legal do’s and don’ts of passing on land and property

People choose to gift property for many reasons: to plan their estate, to see their families benefit during their own lifetime or, to reduce inheritance tax.

Avoid the pitfalls of gifting land – legal experts from Wilkin Chapman share their expertise.
Avoid the pitfalls of gifting land – legal experts from Wilkin Chapman share their expertise.

But how should you do it in the best way legally?

Here Laura Fahy and Charlotte Boyes, both experts at Wilkin Chapman share their knowledge on transferring land and property.

The basic rule is that land can only be transferred, including by gift, by a deed and signed by the person making the gift (the donor ), with a witness. So the following, will not work:

Laura Fahy

1. Making a verbal gift, by telling the donor that you are giving them the property.

2. Handing over the title deeds to the property, expressing this to be a gift of the property (although there may be very limited circumstances where this would work).

3. Handing over keys to the property.

4. Writing a letter purporting to gift the property.

Charlotte Boyes

People gift land for many reasons such as planning for future generations to take over a farming business and for inheritance tax purposes. When land is gifted the value of the property is taken out of the estate of the donor for inheritance tax purposes, after seven years.

The seven year clock will only start once an effective gift has been made. It is therefore essential that the transfer of the gifted property is done properly at the outset.

You can gift some agricultural property free of inheritance tax, either during your lifetime or as part of your Will, by utilising agricultural property relief.

A lifetime gift of land is likely to be treated as a disposal at market value for capital gains tax purposes, which could give the person making the gift a big tax bill. In some circumstances, the tax can be postponed so that it only becomes payable at a later disposal by the person receiving the gift (the donee), if it is a gift of a business asset and certain conditions apply. If those conditions do not apply then you could consider transferring the land to a discretionary trust during your lifetime instead, which may enable you to postpone the gain. The discretionary trust would also enable the person making the gift to retain some control over what happens to the land in the future.

There are other factors to consider when gifting land. If you still wish to use the land after it is gifted, such as for farming purposes, there are further provisions which need to be made. If these provisions are not made it may result in a reservation of benefit. This means that the value of the gifted land may need to be included in your estate for inheritance tax purposes on your death, even if you survive 7 years after making the transfer.

You can potentially still use the gifted land and not fall foul of the “reservation of benefit rules” by entering into a rental agreement with the person you gift the land to and by paying market rent. The person receiving the gift may have to pay Income Tax on any rental income they receive, but this may ultimately be cheaper than the Inheritance Tax payable when the donor dies.

Gifting land in your lifetime

In order to make a gift of land during your lifetime there are a number of legal requirements that need to be complied with as follows:

1. The donor needs to have the relevant mental capacity to be able to make the gift.

2. The donor must have the ‘intention’ of making the gift.

3. The subject matter of the gift must be certain.

4. The donor should not receive anything in return for the gift.

5. There must be a valid transfer of ownership

If the Property to be gifted is unregistered, a gift will necessitate first registration of the title to the Property at HM Land Registry (HMLR). If the title is already registered, it is necessary to apply to HMLR to register the donee as the new owner. HMLR charge fees, based on the value of the property.