The prop­erty gift that may carry a sting in its tail

Yorkshire Post - Property - - PROPERTY - David King

THIS week we look at the tax po­si­tion where a buy-to-let prop­erty is gifted.

This is a com­plex area but is an op­tion worth ex­plor­ing.

For in­di­vid­u­als of a cer­tain age, seek­ing ways to re­duce their fam­ily’s ex­po­sure to in­her­i­tance tax (IHT) be­comes a pri­or­ity and that ap­plies when it comes to in­vest­ment prop­erty.

Con­sid­er­a­tion may be given to mak­ing a gift of a buy-to-let prop­erty to adult chil­dren but this can give rise to an un­ex­pected cap­i­tal gains tax (CGT) li­a­bil­ity for the un­wary.

So here are some tips for those who need to ex­er­cise cau­tion: the gen­eral rule is that where you make a gift of a cap­i­tal as­set, such as a prop­erty, it is treated for CGT in the same way as if you had sold the prop­erty at its mar­ket value. There­fore, even where you have not ac­tu­ally re­ceived any money, you still can have a tax li­a­bil­ity.

Let’s look at an ex­am­ple to il­lus­trate how this works:

A mar­ried cou­ple de­cide to make a gift of a jointly-owned buy-to-let prop­erty to their adult chil­dren. The prop­erty was bought 10 years ago for £80,000 and has a cur­rent value of £200,000. There­fore, the gift gives rise to a “deemed” cap­i­tal profit of £120,000 and this is fully tax­able to CGT.

Af­ter de­duct­ing each in­di­vid­ual’s tax-free an­nual ex­emp­tion of £10,600, the tax li­a­bil­ity would be al­most £28,000, as­sum­ing the cou­ple are high­er­rate tax­pay­ers.

So is there any way of avoid­ing this charge? Well, it might be pos­si­ble to ar­range the gift to be made to a trust that is cre­ated for the ben­e­fit of the chil­dren.

The key ad­van­tage of us­ing a trust is that “hold over re­lief” is avail­able, which means that the tax li­a­bil­ity on the gift is avoided and the trust picks up the prop­erty at its orig­i­nal cost of £80,000.

Were the prop­erty to be sold by the trust then the cap­i­tal profit is wholly tax­able on the trust at 28 per cent, but at least the li­a­bil­ity is de­ferred un­til a sale of the prop­erty.

Also, the terms of the trust can be flex­i­ble enough to al­low the trust’s prop­erty to be ap­pointed out to the ben­e­fi­cia­ries at the dis­cre­tion of the trustees, which means that at some point the prop­erty can be trans­ferred out to the chil­dren ab­so­lutely, which would there­fore achieve the out­right gift to them that had orig­i­nally been planned for.

Again, on the trans­fer out of the trust there is the avail­abil­ity to “hold over” the gain, with the chil­dren then pick­ing up the prop­erty at its orig­i­nal cost of £80,000. The chil­dren will be li­able to CGT only when the prop­erty is even­tu­ally sold.

It is nec­es­sary to briefly con­sider the way in which the gift is dealt with for IHT pur­poses. With an out­right gift to the chil­dren, the value of the gift is po­ten­tially ex­empt from IHT, known as a “PET”. The value of the gift be­comes fully ex­empt pro­vided that the par­ents live for at least seven years from the gift.

Con­versely, a gift to a trust is im­me­di­ately charge­able to IHT but each in­di­vid­ual is able to make gifts hav­ing a value of up to £325,000 in a seven-year pe­riod be­fore an ac­tual tax li­a­bil­ity would arise.

The trust is a sep­a­rate en­tity for IHT pur­poses and a de­tailed ex­plo­ration of those rules is be­yond the scope of this ar­ti­cle, but suf­fice to say that for as long as the value of the trust as­sets re­mains be­low the £325,000 limit (or £650,000 where the trust is cre­ated by a mar­ried cou­ple), there would be no IHT charges aris­ing on the trust.

If you are con­sid­er­ing tak­ing steps to re­duce your prospec­tive IHT li­a­bil­ity, it is es­sen­tial that you seek ap­pro­pri­ate pro­fes­sional ad­vice.

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