A Deed of Gift is a legal document used to voluntarily transfer ownership of property, assets, or money to another person without any payment or compensation. In the UK, such deeds are commonly used for transferring property within families, often as part of estate planning, or to pass assets on to loved ones. But while it may appear straightforward, creating a Deed of Gift involves a range of legal, financial, and tax considerations, many of which have associated costs. This comprehensive guide explores the cost factors of a Deed of Gift in the UK, including legal fees, tax implications, and other potential expenses.
Chapter 1: What is a Deed of Gift?
Before diving into the costs, it’s important to understand exactly what a Deed of Gift entails.
1.1 Definition of a Deed of Gift
A Deed of Gift is a formal, legal document that records the transfer of ownership of property or assets from one person (the donor) to another (the donee). The transfer is made voluntarily, with no expectation of payment or compensation. It can apply to:
- Property: Residential or commercial real estate.
- Cash: A lump sum of money.
- Chattels: Personal possessions such as art, jewellery, or furniture.
- Shares or Investments: Financial securities or shareholdings in a company.
A Deed of Gift can be made between individuals or entities, such as between family members or a donor and a charity.
1.2 Why Use a Deed of Gift?
The reasons for using a Deed of Gift vary but typically include:
- Inheritance Planning: Transferring property to family members in order to reduce the value of the estate for inheritance tax (IHT) purposes.
- Avoiding Probate: Property gifted during a lifetime avoids being part of the donor’s estate, thus bypassing the need for probate.
- Family Planning: Parents or grandparents may use a Deed of Gift to provide financial assistance to children or grandchildren, such as gifting a home or funds for education.
However, there are important legal and tax implications that must be understood before proceeding, and these also contribute to the overall cost of creating a Deed of Gift.
Chapter 2: Legal Costs for Creating a Deed of Gift
One of the primary expenses associated with a Deed of Gift is the cost of hiring a solicitor to draft and execute the document. The complexity of the transfer and the legal support required will influence the final cost.
2.1 Legal Fees
Solicitors in the UK typically charge for Deed of Gift services in one of two ways:
2.1.1 Fixed Fee
For straightforward transfers, such as gifting cash or personal items, some solicitors offer a fixed-fee service. This can range from £150 to £500 depending on the complexity and location. This type of fee may include:
- Drafting the Deed of Gift.
- Providing legal advice on the implications of the transfer.
- Handling the registration of the deed (if applicable).
Fixed-fee services are typically available for simpler cases that do not involve property or complex tax planning.
2.1.2 Hourly Rate
For more complex transfers, particularly those involving property or significant financial assets, solicitors may charge an hourly rate. Hourly rates in the UK typically range from £100 to £300 per hour, depending on the solicitor’s experience and the region. This fee structure might be applied in cases where:
- The transfer involves multiple parties or assets.
- The Deed of Gift forms part of a larger estate or inheritance planning strategy.
- Tax planning advice is required (particularly in relation to inheritance tax or capital gains tax).
2.1.3 Additional Legal Services
Certain situations may require additional legal services beyond drafting the Deed of Gift. For example:
- Property Transfers: If the deed involves the gifting of property, the solicitor may also need to handle the transfer of title with the Land Registry, which can increase legal costs.
- Trusts: In some cases, a Deed of Gift may need to be accompanied by the creation of a trust, which incurs additional legal work and costs.
2.2 Land Registry Fees
When gifting property, the transfer must be registered with the HM Land Registry, and this process incurs a fee. The cost depends on the value of the property and whether the registration is handled electronically or by post.
2.2.1 Electronic Submission
For property transfers submitted electronically by the solicitor, the Land Registry fees are generally lower. As of 2023, the fees for registering property transfers are as follows:
- Property value up to £80,000: £20
- Property value £80,001 to £100,000: £40
- Property value £100,001 to £200,000: £95
- Property value £200,001 to £500,000: £135
- Property value over £500,000: £270
2.2.2 Postal Submission
For postal submissions, fees are typically higher, ranging from £40 to £540 depending on the value of the property.
Chapter 3: Tax Implications and Costs of a Deed of Gift
One of the key concerns when considering a Deed of Gift is the potential tax implications. Although a Deed of Gift itself does not incur taxes directly, there are various taxes that may arise as a result of the transfer, including inheritance tax (IHT), capital gains tax (CGT), and stamp duty land tax (SDLT). Each of these can contribute to the overall cost of gifting property or assets.
3.1 Inheritance Tax (IHT)
Inheritance Tax is a major consideration when making gifts, particularly for larger gifts such as property or high-value assets.
3.1.1 Potentially Exempt Transfers (PETs)
Gifts made through a Deed of Gift are considered Potentially Exempt Transfers (PETs) for IHT purposes. If the donor survives for seven years after making the gift, no IHT is payable on the value of the gift. However, if the donor dies within seven years, the value of the gift will be added back into their estate for IHT purposes.
- IHT Threshold: The first £325,000 of a person’s estate is exempt from IHT (this is known as the nil-rate band). Any assets above this threshold are taxed at 40%.
- Taper Relief: If the donor dies within seven years of making the gift, taper relief may apply to reduce the IHT payable. The percentage of tax payable decreases over time, starting at 100% if the donor dies within three years and reducing to 0% after seven years.
3.1.2 Gifting Property
If the gift is a property, and the donor continues to live in the property after gifting it (known as a gift with reservation of benefit), the full market value of the property will be included in their estate for IHT purposes, even if they survive seven years. To avoid this, the donor must either:
- Pay rent at the market rate to the new owner.
- Move out of the property after gifting it.
The IHT implications of gifting property can be complex, and professional tax advice is often recommended.
3.2 Capital Gains Tax (CGT)
Capital Gains Tax is another potential cost associated with a Deed of Gift, particularly when gifting property or shares.
3.2.1 When is CGT Payable?
CGT is payable when the donor gives away an asset that has increased in value since they acquired it. The gain is calculated based on the difference between the original purchase price (or acquisition cost) and the market value at the time of the gift.
3.2.2 Principal Private Residence Relief
If the gift is the donor’s main home, they may qualify for Principal Private Residence Relief, which exempts them from CGT. However, if the gift is a second home, investment property, or other valuable asset (e.g., shares), CGT may be payable.
3.2.3 CGT Rates
The rates for CGT in the UK depend on the asset and the taxpayer’s income tax band:
- Residential property: 18% for basic rate taxpayers, 28% for higher and additional rate taxpayers.
- Other assets (e.g., shares, personal possessions): 10% for basic rate taxpayers, 20% for higher and additional rate taxpayers.
Each individual also has an annual CGT allowance (£6,000 in 2023/24), which reduces the taxable gain.
3.3 Stamp Duty Land Tax (SDLT)
Stamp Duty Land Tax may be payable when gifting property, though in many cases, it can be avoided.
3.3.1 SDLT on Property Gifts
In most cases, SDLT is not payable on a gift of property, as no money changes hands. However, if the property is transferred along with a mortgage, SDLT may be due on the outstanding mortgage amount. For example:
- Outstanding mortgage of £250,000: The donee may need to pay SDLT based on the value of the mortgage.
3.3.2 SDLT Rates
SDLT rates vary depending on the property value and the buyer’s circumstances. As of 2023, SDLT rates for residential properties are:
- Up to £250,000: 0%
- £250,001 to £925,000: 5%
- £925,001 to £1.5 million: 10%
- Above £1.5 million: 12%
The donee should consider SDLT when calculating the cost of receiving a gifted property.
Chapter 4: Other Costs and Considerations
In addition to legal fees and taxes, there are other costs and considerations associated with making a Deed of Gift.
4.1 Independent Valuations
If the gift involves property, shares, or other significant assets, an independent valuation may be required to establish the market value at the time of the gift. This is particularly important for tax purposes (e.g., CGT and IHT).
- Property Valuation: A professional property valuation can cost between £200 and £600, depending on the complexity and location.
- Shares and Investments: Valuing shares or other financial assets may require the services of a financial advisor, which can cost upwards of £500.
4.2 Trusts
In some cases, donors may choose to place the gifted asset into a trust rather than transferring it directly to the donee. Trusts can offer additional tax planning benefits, but they also come with additional legal and administrative costs.
- Setting up a Trust: Setting up a simple trust can cost between £500 and £2,000 in legal fees.
- Trust Management: Ongoing management of the trust (e.g., trustee fees, annual reporting) can add further costs over time.
4.3 Financial Advice
Due to the complexity of tax and legal implications, it is often advisable to seek financial advice when making a Deed of Gift. A qualified financial advisor can help assess the tax consequences and advise on the most efficient way to structure the gift.
- Financial Advice Fees: Fees for financial advice vary widely but can range from £150 to £300 per hour.
4.4 Insurance
After gifting an asset, particularly property, the donor should ensure that appropriate insurance is in place. The donee will typically need to take out buildings and contents insurance on the property. If the donor continues to live in the property after the transfer, they may need a specific type of policy to reflect the new ownership arrangement.
Chapter 5: Total Cost Breakdown
To provide a clearer picture of the total cost of creating a Deed of Gift, consider the following example of a property transfer:
5.1 Example Scenario
- Donor: A parent gifting their second home to a child.
- Property value: £300,000.
- Outstanding mortgage: None.
5.2 Cost Breakdown
- Legal Fees: £500 for a solicitor to draft the Deed of Gift and handle the property transfer.
- Land Registry Fees: £135 (for electronic submission).
- Independent Property Valuation: £400.
- Capital Gains Tax: Assume a taxable gain of £50,000, taxed at 28% (higher-rate taxpayer) = £14,000.
- Financial Advice: £300 for one hour of tax advice.
Total Cost: £15,335
This example demonstrates that, while the legal fees for drafting a Deed of Gift may be relatively modest, tax liabilities (particularly CGT) can significantly increase the overall cost of the gift.
Chapter 6: Conclusion
The cost of creating a Deed of Gift in the UK can vary widely depending on the nature of the assets being gifted and the specific legal and tax circumstances involved. While the process of drafting the deed itself may cost between £150 and £500, the total costs can be much higher when taking into account capital gains tax, inheritance tax planning, SDLT, and other professional fees. Donors should always seek professional legal and financial advice to ensure they fully understand the implications of their gift and to minimise any unnecessary tax liabilities.