The gifting of property between family members is regularly discussed when looking at wealth and succession planning if a property portfolio is involved. However, the tax implications of such transactions are wide ranging and require careful consideration.
Recently, Afford Bond’s Tax Director, Chris Regnauld has been advising several clients requiring further property tax advice and he explained: “Unless a property transfer is clearly a ‘bargain made at arms length’ between two unconnected parties, HMRC will deem the transaction to take place at market value.
“If, for example, a parent gifts a buy-to-let property to their adult child, there is likely to be capital gains tax payable on the increase in value from the date the property was originally acquired to the date it was transferred. This is the case irrespective of whether or not cash (or any other consideration) is paid,” said Chris Regnauld.
There is currently an annual capital gains tax free tax allowance of £11,700 (2018/19). Any gain above this is taxed at either 18%, 28% or a combination of both, subject to the individuals level of income. In some circumstances, it may be possible to pay tax in instalments over a period of up to 10 years but HMRC will charge interest on this option.
“One exception to the market value rule is the transfer of assets between spouses and civil partners,” said Chris Regnauld. “If you and your spouse or civil partner are living together, any transfer of an asset between you is treated as giving rise to neither a gain nor a loss to the person transferring it. Any amount actually paid is ignored. If the person receiving the asset later disposes of it, he or she will be treated as if they had paid an amount equal to the total of your costs.”
STAMP DUTY LAND TAX (SDLT)
In contrast to the above, stamp duty is only payable on a property transfer when there is consideration given for the acquisition. So, if a property is gifted with no cash being paid by the acquiring party, is it correct to assume that there will be no stamp duty land tax payable?…Not necessarily.
If an outstanding mortgage or any other debt is transferred along with the property, this will be deemed ‘consideration’ for the purposes of SDLT. The amount of debt taken on by the acquiring party will be subject to the residential rates of stamp duty. Also, subject to the amounts concerned, the higher rates of stamp duty applicable to ‘additional properties’ may apply. This is an additional 3% chargeable on top of the standard residential property tax rates.
INHERITANCE TAX (IHT)
“Another important consideration when transferring property,” advised Chris Regnauld, “is the potential impact that it will have on your estate from an inheritance tax perspective. Other than in very specific circumstances (such as the gift of property to a trust or company), there will be no immediate exposure to IHT when a property is gifted from one individual to another.”
Property gifts generally count as a “potentially exempt transfer” under the inheritance tax rules. This means that they can be made inheritance tax-free as long as the giver survives for seven years following the gift. Also, each person has an inheritance tax allowance of £325,000, so if the entire estate on death, including any potentially exempt transfers, is worth less than this, there is no inheritance tax liability either way.
It should be noted that there is also an additional IHT allowance of £125,000 (on top of the £325,000) that can potentially be utilised against the value of the deceased persons main residence. This allowance is increasing to £175,000 from April 2020 and may potentially provide married couples with total tax free allowances of up to £1m.
As you can see, there are a number of taxation issues to consider when transferring property between connected parties. It is imperative that expert tax advice is sought in order to ensure that your property affairs are dealt with in the most tax efficient manner.
Cheshire accountants, www.affordbond.co.uk can offer expert tax advice and IHT guidance. If you would like help with your property tax affairs or HMRC self-assessment our Tax Director, Chris Regnauld, can be contacted via email at Chris.Regnauld@affordbond.com.