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We would like to downsize to a smaller house with enough land to build a couple of starter homes. We'd give our four children the plots and they would pair up to raise the finance for two small semis. They may well not wish to live so near us and would probably sell the houses on, splitting the profits. Providing we survive for seven years, I presume the value of the gifted land becomes irrelevant for Inheritance Tax purposes and the children should have no tax to pay on the sales as the houses would be their only property. Are there any financial implications we have overlooked?
Maggie Fleming writes:
As you intend to gift the plots to your children with no strings attached, you should not fall foul of the IHT "gifts with reservation of benefit" rules, so the value of the land gifted should fall out of your estates after seven years. Nor will you be caught by the recent pre-owned assets tax.
People often forget that gifts can trigger a charge to Capital Gains Tax but, in this instance, that should not be a problem. Leaving aside the issue of whether or not the gifted land would be considered part of the grounds of your principal private residence and therefore exempt, you will undoubtedly make the gifts soon after acquiring the land, so there won't be time for the plots to appreciate in value before the transfer.
It is your children who may have tax problems. They will not be eligible for principal private residence relief unless they occupy the houses with at least the intention of doing so with some degree of permanence. What permanence means is nebulous; there is no set period. I do not know their ages or personal circumstances but the likelihood of the four of them living in adjoining semis in your grounds sounds remote.
If your children had bought the land themselves, HMRC would probably levy income tax on the profit on the grounds that building the houses constituted a one-off trading venture. It is harder, but not impossible, for them to make such a case where the land was acquired by gift. Alternatively, there are anti-avoidance provisions they could invoke to tax the profit/gain. This is a complex area and you should consult a tax practitioner for detailed guidance.
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