Are you considering gifting something special to a loved one? Maybe a family heirloom or even your property to safeguard their future? Then, you will need to know what a deed of gift is and how it all works.
In this article, we will be looking at what a deed of gift is, when you would need one and how to go about creating one and ensuring it is legal and valid.
What is a Deed of Gift?
Imagine receiving a thoughtful present for your birthday – well that's a bit like what a deed of gift is. It's a legal document used when someone wants to give a valuable item or property to someone else as a gift. This "gift" is often given without expecting anything in return. It’s a straightforward gift of generosity.
The primary function of a deed of gift is to transfer ownership from the giver (known as the donor) to the recipient (donee). Once the deed is executed, the recipient becomes the legal owner of the gifted item.
The transfer is voluntary and typically involves no consideration or payment from the donee. However, whilst gifts are generally tax-free, there could be inheritance tax implications if the giver passes away within seven years of making the gift.
If gifting a property, the TR1 (Transfer Deed) and AP1 (Application to Register) forms are essential documents used in the process of transferring the ownership. These forms are typically submitted to the Land Registry as part of the property registration process.
Be warned - once a deed of gift is executed, it is generally irreversible. The giver cannot take back the gift unless specific conditions outlined in the deed are not met.
What is a Deed of Gift with Reservation?
Now, imagine wanting to give a valuable possession, like a piece of land or a family heirloom, but you still want to enjoy some benefits from it for a period. This is where the "reservation" part comes in.
In a deed of gift with reservation, the giver (also known as the donor) retains certain rights or benefits associated with the gifted property even after giving it away. For instance, you might decide to gift your house to a family member but reserve the right to live in it for the rest of your life. This would mean that whomever you choose to gift your house to, would only receive that gift when you die.
As is often the case, to make this arrangement legally binding, a deed needs to be created outlining the terms of the gift, specifying the rights being reserved by the donor.
Crafting a Deed of Gift with Reservation requires legal expertise to ensure that the document is clear, enforceable, and complies with relevant laws.
Requirements for a Deed of Gift
Creating a Deed of Gift and making sure it is official involves several key requirements to ensure its valid and can be followed through.
Some of the essential key requirements are:
In Writing: The Deed of Gift must be in writing to be legally valid. Verbal gifts are generally not enforceable in a legal context.
Clear Intention to Gift: The document should clearly express the intention of the giver (donor) to make a gift to the recipient (donee).
Identification of Parties: The names and details of both the giver and the recipient must be accurately stated in the deed.
Detailed Description of the Gift: The deed should provide a thorough and precise description of the property, item, or asset being gifted. This helps avoid confusion or disputes in the future.
Acceptance by the Recipient: The recipient must formally accept the gift, acknowledging their understanding and agreement to the terms outlined in the deed.
Delivery of the Gift: There must be an actual or symbolic delivery of the gift. In the case of tangible items, physical transfer is necessary. For financial assets or property, relevant documentation or processes should be completed.
Voluntariness: The gift should be given willingly and without any coercion or undue influence. Both parties must enter into the arrangement freely.
Legal Capacity: Both the giver and the recipient must have the legal capacity to enter into such an agreement. This means they should be of sound mind, not under the influence of substances, and of an age where they can legally make contracts.
Presence of Witnesses: While not always a strict requirement, having witnesses can add an extra layer of credibility to the deed. Witnesses should be impartial and not benefit from the gift.
While not mandatory, seeking legal advice is highly recommended. A solicitor can ensure that the deed is correctly drafted, covers all necessary elements, and complies with relevant laws.
Stamp Duty Considerations
Depending on the value of the gift, stamp duty may be applicable. You must consider and address any stamp duty requirements associated with the transfer.
Remember that laws may evolve, and it's advisable to consult with a legal professional to ensure compliance with the most up-to-date regulations.
Deed of Gift vs Deed of Variation
Whilst a deed of gift is used when someone wishes to give a valuable item, property, or asset to another person whilst they are still alive, a deed of variation is used when beneficiaries of an estate wish to change the distribution of assets specified in a will or under intestacy laws after the death of the testator.
So, instead of receiving their designated share, beneficiaries can vary the terms to redistribute assets among themselves or redirect them to other beneficiaries.
One common use of a deed of variation is for tax planning purposes. It allows beneficiaries to potentially reduce the overall tax liability of the estate.
To be effective for tax purposes, a deed of variation usually needs to be executed within two years of the deceased's death.
A summary of the key differences:
Nature of Transaction:
A Deed of Gift involves a voluntary transfer of ownership from one living person to another without expecting anything in return.
A Deed of Variation involves altering the distribution of assets after someone has passed away, typically to achieve tax benefits or better suit beneficiaries' needs.
Timing:
A Deed of Gift can be executed at any time when the donor is alive.
A Deed of Variation is typically executed within two years of the deceased's death for tax planning purposes.
Do I Need a Solicitor for a Deed of Gift?
Simply put: No. It is not a legal requirement to involve a solicitor in the creation of a deed of gift, however seeking professional legal advice is highly advisable and can offer several benefits, particularly where there may be potential inheritance tax implications to consider.
Getting a solicitor involved can be like having a guide on this legal journey. While you can create a deed of gift on your own, having a solicitor ensures everything is done correctly and helps avoid potential problems down the road.
Do You Pay Tax on a Deed of Gift?
Ah, the tax question. Whilst gifts are generally tax-free, there are some exceptions.
I’m sure you’ve heard of Inheritance Tax - well this is a tax on the estate of someone who has passed away. Gifts made during a person's lifetime are subject to Inheritance Tax if the giver (donor) passes away within seven years of making the gift.
The magic "seven-year rule" is crucial to understanding the potential tax implications of a gift. If the donor survives for seven years after making the gift, it is generally exempt from Inheritance Tax.
Gifts are categorised as Potentially Exempt Transfers (PETs) if they are made with the expectation that the donor will live for at least seven years. If the donor passes away within this period, the value of the gift may be included in their estate for Inheritance Tax purposes.
Certain gifts are exempt from Inheritance Tax, regardless of the seven-year rule. This includes gifts between spouses or civil partners, gifts to registered charities, and gifts up to the annual exemption limit.
Each individual has an annual exemption limit, allowing them to give a certain amount each tax year without incurring Inheritance Tax. If the gift exceeds this limit, it may be subject to tax.
There is also a small gifts exemption, allowing individuals to make small gifts of up to a certain amount to any number of people each tax year without it being subject to Inheritance Tax.
How Much Does a Deed of Gift Cost?
The cost can vary, but it's usually a reasonable price to ensure everything is done correctly.
As with anything, the type of assets being gifted can impact the cost. For example, transferring a property through a deed of gift may involve additional complexities and paperwork compared to a simpler gift of personal belongings.
Also, if additional services are required, such as tax advice, notarisation, or witnessing, these may incur extra costs.
At Lawhive, we can assess your case within 48 hours, giving you a no obligation quote so you have all the information you need to proceed quickly and with no hidden fees.
How Long Does a Deed of Gift Take?
Patience is key with a deed of gift. The process can take some time depending on your individual circumstances, nature and complexity of the gift, and the legal advice needed throughout the process.
In simple gifting cases, the time it takes would be much shorter.
Is a Deed of Gift Proof of Ownership?
Absolutely! A deed of gift is like a legal certificate saying, "This is now yours!" It's solid proof that the gift has officially changed hands and acts as a proof of ownership for the transferred property or asset.
Does a Deed of Gift Need to Be Witnessed?
Yes, indeed. A deed of gift needs to be witnessed as it adds an extra layer of security, and ensures it is legally valid. The presence of witnesses helps confirm that the donor executed the deed voluntarily and that the contents of the document accurately represent their intentions.
Generally, a deed of gift requires at least one witness. However, having two or more witnesses is common practice and can provide additional assurance of the deed's authenticity.
Witnesses should also be adults, mentally competent, and not beneficiaries of the gift. They must be impartial and have no vested interest in the transaction.
In the event of a legal dispute or challenge to the deed, witnesses may be called upon to provide testimony regarding the circumstances surrounding the execution of the deed of gift.
While notarisation is a separate process involving a Notary Public, witnessing serves a similar purpose in confirming the authenticity of the document. Some legal documents, including deeds, may require both witnessing and notarisation for added assurance.
Deed of Gift and IHT Implications
Now, about that inheritance tax we mentioned earlier. If the giver passes away within seven years, the value of the gift might be taxed.
Check out this article for more details: 3 Tax Implications To Consider Before Gifting Property
Deed of Gift and the 7-Year Rule
Generally, the seven-year rule is fundamental when it comes to gifts and Inheritance Tax. If the donor survives for seven years after making the gift, the value of the gift is generally exempt from Inheritance Tax.
If the donor passes away within seven years of making the gift, the value of the gift may be subject to Inheritance Tax. The tax liability reduces on a sliding scale based on the number of years between the gift and the donor's death.
Taper relief is applied to reduce the Inheritance Tax liability on gifts made within the seven-year period. The longer the donor survives after making the gift, the lower the tax rate on the gifted amount.
Gifts to certain types of trusts may have immediate Inheritance Tax implications, and special rules apply. Seeking professional advice is crucial when considering gifts to trusts.
