Can I swap houses with my daughter?

My daughter has two very young children and lives in a one-bedroom flat with her boyfriend. We live in a four-bedroom house with a garden which is becoming unmanageable and wish to swap properties. Please advise the best approach to avoid paying inheritance tax or other taxes.

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Robert Wright, partner in the private client department at law firm Hunters, says that assuming your house is more valuable than your daughter’s, you and your partner are likely to be treated from an inheritance tax perspective as having made a gift to her of the difference between the two values.

Provided you and your partner survive seven years following the swap, the gift will fall out of the inheritance tax net. If either of you die during this time, however, it will be taken into account for the purposes of the inheritance tax calculation on your death and may affect the amount of tax payable.

Additional complications would arise if there were any “strings attached” to the gift, for example if you or your partner reserved any rights to make use of the house after transferring it to your daughter, in which case, for inheritance tax purposes, the gift might not be effective.

In terms of capital gains tax, assuming that in both your and your partner’s case, and also your daughter’s case, you have occupied the property as your only or main residence throughout the time you have owned it, the transaction should be free from tax. If this is not the case for any of you, however, it is possible that the exchange could trigger a charge to tax, based on the value of the property at the date of the exchange, and whether this is greater than the value of the property at its acquisition.

It may well be the case that the most immediate tax concern will be stamp duty. This is because, even if no money changes hands, you and your partner will be subject to stamp duty on the acquisition of your daughter’s property, and your daughter will be liable to it on her acquisition of yours, in each case based on the market value of the property acquired at the time of exchange.

Of course, tax is not the only consideration in circumstances such as these. It is important to ensure that by making any such gifts to your daughter, you do not deprive yourselves of funds you may need in the future, for example for your own living expenses or care costs in later life.

You will also no doubt wish to consider the position of your daughter’s boyfriend, and she may wish to take advice on protecting her interest in the larger house in the event of her relationship with her boyfriend coming to an end. This might involve a cohabitation agreement, or if marriage is on the cards, a prenuptial agreement.

Finally, if either of the properties has an outstanding mortgage, this is likely to add considerable complexity to the transaction, given that the lender will insist on the mortgage being repaid before the exchange is made.

Read the full article in the Financial Times here, behind a paywall.