Avoid Capital Gains Tax on Gifted Property UK

Can I sell my house to my son for £1 & How Do I Avoid Capital Gains Tax on Gifted Property UK?

 

We are often asked, “How Do I Avoid Capital Gains Tax on Gifted Property in the UK?”

We often have clients who wish to sell or gift properties to their children, whether sons or daughters. For example, they ask our property accountants: Can I sell my house to my son for £1?

You can sell a house to a son for £1 or a home to a daughter for £1.

Does this transaction affect the Capital Gains Tax (CGT) you will pay in the UK? Unfortunately, not.

CGT for connected persons is based on market value rather than the amount you wish to sell the property for. This means that the gifted house will be subject to CGT.

In this case, a father who sells/gifts his house to a son for £1 worth £300,000 will be deemed to have received £300,000.

This should not be a problem anyway. This is because the house in this scenario is a home. Do not forget that you benefit from Private Residence Relief (PRR) on homes.

PRR tax relief only applies if you have lived in the home. Buy-to-let properties that have not been lived in and sold for £1 would still have a sales figure of £300,000, and CGT is likely.

 

CGT on inherited property.

You pay HMRC CGT on any gains made on an asset when sold. Assets you have inherited will benefit from an adjustment to their cost base. The deemed cost of the asset will be the asset’s market value at the date inherited.

Mrs Jones inherited property that her mum originally purchased for £50,000. The market value of the inherited house was £200,000 when it was transferred to her.

Mrs Jones sold the inherited asset for £250,000 a year later. The capital gain will be based on:

– £250,000 sales price of the inherited asset

– £200,000 market value of the inherited asset

– £50,000 capital gains which CGT will be based on the inherited asset

If Mrs Jones lived in the home, she would also benefit from Private Residence Relief (PRR) to reduce CGT on the inherited property.

It is possible to transfer an inherited asset to someone else within two years of death. Let us imagine that Mrs Jones wanted the inherited asset given to her son Tom (16).

The gift of the inherited asset from Mrs Jones to Tom would cause a CGT problem as they are connected persons. However, the inherited asset received by Mrs Jones could have been assigned directly from her mother to Tom.

A variation of a will may be done within two years of death. This means that the inherited house could be passed directly to Tom from Mrs Jones. The inherited asset would not be in the hands of Mrs Jones and would not be subject to CGT when making s gift to Tom. This is because the gift would be from Mrs Jones’s mum, not Mrs Jones.

Using the right accountant, CGT on inherited assets may be avoided. Far too many people pay CGT on inherited assets because they are unaware of the will variation. If family wealth is managed correctly, inherited assets should not be subject to CGT or IHT. Look at the royal family; they do things correctly on inherited assets. No CGT or IHT exists.

Inherited assets may already be subject to IHT. We think it would be unfair if the inherited asset is then subject to CGT by transferring it to another family member. The inherited asset would be subject to double taxation, which is immoral.

Speak with our inherited assets specialist accountants before a will is written or within two years of the assets being inherited.

Gift Property to Children into a trust without paying Capital Gains Tax

This page will discuss gifting investment property to children without paying capital gains tax and cover related subjects. Gifting an asset is transferring ownership from you to another person.

You may be interested in our main article on Capital Gains Tax rates and allowances.

You would transfer/gift BTL properties when you create a trust and back again to your adult child for the following reasons:

– Reduced income tax for the parent (especially if they are a high rate taxpayer)

– Provides an income for the adult child

– Reduced the asset value of the parent for IHT purposes

You may want to transfer/gift properties from your estate to your children but do not wish to pay Capital Gains Tax and would like to avoid IHT.

Ordinarily, you will be liable for Capital Gains tax if you wish to transfer/gift your children a Buy-to-Let (BTL). This is because HMRC deems that the parent received the market value, even if the asset was given away for free. CGT will be based on market value, less purchase price, and less capitalised refurbishment costs.

The Capital Gains Tax is 18% for basic rate taxpayers and 24% for high rate taxpayers after taking out their £3,000 Capital Gains Tax annual exemption. Our property accountants are on hand to guide you on this matter.

A step by step guide of how to transfer/gift properties to children without paying CGT and IHT

1 – Identify assets with a value of less than £325,000 (below the IHT threshold) to gift. Anything above this value will be subject to IHT at 20% (if paid by the settlor)

2 – Transfer/gift the asset into a Trust (debt/mortgage-free) and calculate the IHT liability

3 – After three months of the trust being created, transfer the assets from the trust to the adult child and calculate the IHT exit charge

4 – Complete and submit the IHT100 form within 12 months of the said transfer

Why you should read this article about gifting buy to let properties to children or another family member

The Section 24 mortgage interest relief cap has had a major impact on parents’ financial affairs. Parents also wish to help their children get on the property ladder.

There are many advantages of transferring or gifting a buy-to-let to children.

– The buy-to-let asset will no longer be income-generating. As such, the amount of income tax paid by a parent is reduced

– You help get your children onto the property ladder and help to reduce the eventual buy-to-let IHT  problem. This is achieved by gifting assets to children. You can, of course, gift assets to another family member

– You do not wish to pay Capital Gains Tax on the transfer of a buy-to-let property that you have gifted the asset to a loved one and a family member.

CGT avoidance using a trust TCGA S.260

We will now focus on the subject of transferring/gifting a BTL into a legal structure. You create a trust whilst avoiding CGT and IHT. The piece of legislation that we will focus on is Section 260 of TCGA. Always make sure that you take legal advice from a qualified solicitor who knows how to deal with property transactions.

If the trustees pay, the tax is 20% over and above the IHT allowance (£325,000 per person). Suppose the settlor pays IHT. These calculations are complex, as seen on HMRC’s website and the legislation pages.

This is much more complicated if transfers have been made in the past 7 years. Additional IHT reliefs for gifts, weddings, etc., have been added. We would suggest that you speak with a specialist about this. You gain confidence by speaking with one of our accountants when making a gift to a child.

Can I transfer/gift house into trust for my children?

One of the ways that you can mitigate CGT and IHT is by using trusts.

That said, you do not need to use a trust to transfer/gift your house into a trust. Especially if you have always lived in that home. The reason is that you can give the house to children without capital gains tax.

CGT is only chargeable if you have a gain. There are no gains on gifting your home to children as you benefit from Private Residence Relief (PRR).

As a rule of thumb, you can gift your home to children and pay no IHT. This is provided that you live for seven years or more.

 

Transfer/gift of buy to let to children using trusts

You need to know that the above strategy will not work if you are transferring/gifting assets to a minor. This is because any assets passed from a parent to a minor remain an asset of their estate, and any income derived from the asset is treated as income for the parent. As you can see, this only works when you transfer assets to an adult child.

IHT liabilities & Exit charges by transferring/gifting assets into the trust and then onto the child

You must wait at least three months before you transfer/gift an asset within a trust to your child or a family member. You will need support from a good solicitor to create a trust. Our accountants suggest that their clients take legal advice in conjunction with our advice before proceeding with any action plan.

You would only transfer the asset from the trust within 3 months of the 10-year anniversary. This will ensure that Capital Gains Tax holdover relief is available.

You must consider exit charges once you transfer the asset from the trust to your child. The exit charge is another tax over and above the 20% paid. The value of the asset is its net asset value.

This is a little more complicated, so we will use an example:

– £450,000 asset value

– £325,000 less the nil band for IHT purposes

– £125,000 asset value chargeable to IHT on transfer/gift into a trust

– £25,000 IHT paid (£125,000 times by the 20% IHT)

CGT for the child on disposal of the asset

Please be mindful that the above strategy only defers the Capital Gains Tax liability. The above example shows an asset transfer of £450,000, but because the father used holdover relief, the deemed cost to the son is the original purchase price of £300,000.

3% SDLT surcharge considerations  

If your child already has a home and you transfer the asset to them out of trust, they would have to pay the 3% SDLT surcharge.

Potentially Exempt Transfer also known as PETS and Inheritance

A potentially exempt transfer (PET) means that the person passing an asset to a family member may still pay IHT if they die within 7 years of the original gift.

A PET is fully exempt if the donor survives 7 years from the gift date. However, if the donor dies within 7 years of making a gift, a PET will become a chargeable transfer. If the donor dies within 7 years, an IHT charge will be levied. The recipient of the gift will be responsible for any tax.

The 7-year rule

If you have an Inheritance Tax bill to pay, it’s charged at 40% on gifts given in the three years before your death.

Gifts made 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.

Years between gift and death tax paid.

– less than 3 years = 40% IHT chargeable

– Between 3 and 4 years = 32% IHT chargeable

– Between 4 and 5 years = 24% IHT chargeable

– Between 5 and 6 years = 16% IHT chargeable

– Between 6 and 7 years = 8% IHT chargeable

– After 7 years = 0% IHT chargeable

You do need to take legal advice from a qualified solicitor or financial advisor to ensure that you time your gifts to children or another family member without paying IHT

Are there any Stamp Duty issues when transferring ownership of a property to a loved one?

Stamp Duty is a tax you pay when you buy or transfer the ownership of a BTL to someone else. Stamp Duty Land Tax, or SDLT, is based on the consideration received in exchange. The consideration in a gift of property may be in the form of

– Money

– Repayment of a mortgage

– An asset in exchange for the BTL

– Share in a company of the property was incorporated into a limited company

Gifts from one person to another assume no consideration. SDLT will not be charged if a true gift is provided to someone else.