Avoid Capital Gains Tax (CGT) on inherited/gifted property

Simon Misiewicz

Expat & Property Tax Specialist

16th February 2019

Can I sell my house to my son for £1 | CGT on gifted property to connected persons

Private Residence Relief also referred to as PRR provides a Capital Gains Tax (CGT) exemption for the time they lived in the property (home). There is an additional nine (9) months CGT allowance if you moved out of the property and later sold it. The United Kingdom's Capital Gains Tax is levied on the profit made when selling assets like property or investments. The tax rate varies based on the individual's income tax band, with specific reliefs and exemptions available in certain circumstances. Please note that the annual CGT exemption is £6,000 for 2022/23 and £3,000 for 2023/24

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

The answer is that you can sell a house to a son for £1 or sell a home to a daughter for £1.

Does this transaction affect the Capital Gains Tax (CGT) UK you will pay? The answer is sadly not.

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

In this case, a father who sells/gifts his house to a son for £1 that is worth £3000,000 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 on gifted assets.

PRR tax relief only applies if you have lived in the property. 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 property was £200,000 when it was transferred to her.

Mrs Jones sold the inherited property 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 property, 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 to be given to her son Tom (16).

The gift from Mrs Jones to Tom of the inherited asset 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 property 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.

CGT on inherited assets may be avoided using the right accountant. Far too many people pay CGT on inherited assets because they are unaware of the will variation. Inherited assets should not be subject to CGT or IHT if family wealth is managed correctly. Look at the royal family as 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 that assets are inherited.

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

Gifting investment property to children without paying Capital Gains Tax will be the main discussion point in this article but will cover other related subjects. Gifting an asset is the act of transferring ownership from you to another person. Gifts may avoid all tax if done correctly.

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

Types of tax you pay on inherited / gifted property | Capital Gains Tax (CGT) | Inheritance Tax (IHT) | Stamp Duty Land Tax (SDLT) | Gifting & Inheriting Assets

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 Inheritance Tax (IHT).

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

The rate of Capital Gains Tax to be paid on BTL properties is 18% for basic rate taxpayers and 28% for high rate taxpayers after taking out their £11,700 Capital Gains Tax annual allowance. Our property accountants are on hand to provide you with guidance on this matter.

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

1 – Identify assets that has a value of less than £325,000 (which is 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

how do i avoid capital gains tax on gifted property

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

Section 24 mortgage interest relief cap has had a major impact on the tax affairs of parents. We also know that parents wish to help their children get on the property ladder.

There are many advantages of transferring or gifting a buy-to-let property 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 inheritance tax 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. A gift of any asset could be subject to tax but can be avoided with the right advice.

Capital Gains Tax 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 that knows how to deal with property transactions.

If the trustees pay, the rate of tax is 20% over and above the IHT allowance (£325,000 per person). Suppose the settlor pays the Inheritance bill. Tax instead of the trustee, this means there will be an increased loss from the settlor’s estate. These calculations are complex as can be seen on HMRC’s website and legislation pages.

This is made a lot more complicated if transfers have been made in the past 7 years. Added to this is the additional IHT reliefs for gifts, weddings etc. We would suggest that you speak with a tax 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 Capital Gains Tax (CGT) and Inheritance Tax is with the use of trusts.

That said, you do not need to use a trust if you wish to transfer/gift your house into a trust. Especially if you have always lived in that property. The reason being is that you can gift the house to children without Capital Gains Tax.

Capital Gains Tax is only chargeable if you have a taxable gain. There are no taxable 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 Inheritance tax. This is provided that you live for seven years or more.


Transfer/gift of buy to let property to children using trusts

You need to be aware 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

It is essential that you 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. All of our accountants suggest that their clients should take legal advice in conjunction with our tax advice before proceeding with any action plan.

Only then would you transfer the asset out of the trust within 3 months of the 10 year anniversary. This will ensure that Capital Gains Tax holdover relief is available.

Once you decide to transfer the asset from the trust to your child, you will need to consider exit charges. The exit charge is another form of tax over and above the 20% paid. The value of the asset is the net asset value of the asset.

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

– £450,000 asset value

– £325,000 less the nil band rate 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 rate)

Capital Gains Tax for the child on disposal of the asset

Please be mindful that the above strategy is only deferring 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  

Your child would have to pay the 3% SDLT surcharge if the child does not already have a home and you transfer the asset to them out of trust.

Potentially Exempt Transfer also known as PETS and Inheritance Tax bill

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 date of the gift. A PET will become a chargeable transfer if the donor dies within 7 years of making a gift. On the death of the donor within 7 years, an IHT charge will be levied. Any tax will be payable by the recipient of the gift.

The 7-year rule

If there is an Inheritance Tax bill to pay, it’s charged at 40% on gifts given in the 3 years before you die.

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 Land Tax issues when transferring ownership of a property to a loved one?

Stamp Duty Land Tax on the property is a tax that you pay when you buy or transfer the ownership of a BTL to someone else. Stamp Duty Land Tax, also called SDLT, is based on the consideration received in exchange for the property. 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 assumes that there is no consideration. SDLT will not be charged if a true gift is provided to someone else.

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