Key points:
- Gifts of property are deemed to be made at market value for capital gains tax (CGT) purposes, other than where the gift is to a spouse or civil partner.
- Gifts between spouses and civil partners are made at a value that gives rise to neither a gain nor a loss for CGT purposes.
- The ‘gifts with reservation’ rules may come into play for inheritance tax (IHT) purposes if you give away your home and continue to live in it.
There are various situations when one person may wish to gift a property to another person. The tax implications will depend on the particular circumstances, as indicated in the following case studies. It may be necessary to consider more than one tax.
Example 1 - Gift of second property
Alison has a buy-to-let property which she has owned for a number of years. She purchased the property in 2000 for £100,000. It is currently worth £200,000.
Alison’s son and daughter-in-law are expecting their first baby and cannot afford to buy a home of their own so Alison gifts the buy-to-let property to her son.
For CGT purposes, the property is treated as having been disposed of by Alison for its market value at the time of the gift (i.e. £200,000) and Alison must pay CGT on the disposal. Alison incurs legal fees of £2,000 in transferring title to her son.
The gift is made during 2013/14, and Alison makes no other gains in the tax year. She is a higher rate taxpayer.
£
Market value at date of gifts £200,000
Less: original cost (£100,000)
Costs of transfer (£2,000)
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£98,000
Less: Annual exemption (£10,900)
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£87,100
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Capital gains tax @ 28% (£24,388)
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Trap:
Although no money has changed hands Alison has a significant CGT bill as a result of giving the property to her son. As there are no disposal proceeds from which to pay the bill, Alison will need to find the money from elsewhere.
From an IHT perspective, the gift will be a potentially exempt transfer. There will be no IHT to pay if Alison survives seven years from the date of the gift or if it is covered by her ‘nil rate band’.
Example 2 - Gift of second property spouse or civil partner
David has a property that he has let out for many years. He receives rental income from the property. Following the birth of their first child, his wife, Jane, gives up work to stay at home with their daughter.
From a tax perspective, it makes sense for Jane to receive the rental income of £1,000 a month to avoid wasting her personal allowance. In David’s hands, the rental income is taxed at 40%.
The property cost £100,000 and is currently worth £130,000.
For CGT purposes, gifts between spouses are normally at a value which gives rise to neither a gain nor a loss. Jane simply takes over the original base cost of £100,000, regardless of the fact that the property is worth £130,000 at the date of the gift. When she subsequently sells the property, her base cost is £100,000 rather than £130,000, so she will be taxed on the full increase in value since the property was originally acquired.
For IHT purposes, transfers between spouses are covered by the inter-spouse exemption.
Example 3 - Gift of share in PPR to spouse
William and Emily are married and live in a property owned by Emily. Emily gifts a 50% share in the property to William.
For CGT purposes, where an assets is transferred between spouses it is deemed to be transferred at a value that gives rise to neither a gain nor a loss. Normally, as illustrated in Example 2, the donee acquires the original base cost of the property. Where the property is the principal private residence, this same rule applies but the effective date of the transfer is backdated to the date at which the property was originally acquired. The backdating is contingent on the spouses being married and living together, and the property in which the interest is transferred being the couple’s main residence for CGT purposes.
Emily and William married in 2006 when Emily was working and William was a student. Emily purchased their home at that time in her sole name for £180,000. In 2013, she transfers a 50% share in the property to William. He is treated as acquiring his share for £90,000 in 2006.
Example 4 - Gifts to charity
Tax reliefs are available if a person donates a property to charity and certain conditions are met. The property must be gifted in its entirety and the donor must not retain any benefit from it or continue to live in it.
Income tax relief is available for the market value of the property plus the costs of making the gift, such as legal fees, less any benefit received in return.
For CGT purposes, the disposal is treated as being at a value that gives rise to neither a gain nor a loss. Consequently, no CGT is due.
The gift of a property to charity is exempt from IHT.
Henry gifts his holiday home to a charity. The holiday home cost £80,000 and is worth £120,000 at the date of the gift. Legal fees of £1,500 are incurred in making the gift.
Henry is entitled to income tax relief of £121,500 (i.e. market value of £120,000, plus legal costs of £1,500 in making the gift)
From a CGT perspective, the transfer is deemed to take place at a value of £81,500 (original cost plus cost of sale), which gives rise to neither a gain nor a loss. No CGT is payable by Henry, and the base cost of the property to the charity is £81,500.
The gift of the property is exempt from IHT and does not form part of his chargeable estate.
Example 5 - Gifts with reservation of benefit
Hilda wishes to save IHT and makes a gift of her family home to her two daughters Gillian and Linda. She continues to live in the property.
If Hilda continues to live in the property rent-free she will fall foul of the ‘gifts with reservation’ rules and the property will continue to be treated as part of her estate for IHT purposes. If the property is her PPR, there will be no CGT to pay.
However, if Hilda pays market rent to remain in the property once it has been gifted to her daughters, the gifts with reservation rules do not apply and as long as she survives seven years from the date of the gift there will be no IHT to pay in respect of it.
Example 6 - Gift to child who moves in to live with parent
Joan gifts her property to her daughter. However, Joan is finding it increasingly difficult to manage on her own. She gifts a half share in the property to her daughter Janet, who moves in with Joan to help care for her. They split the bills equally. The half that is gifted to Janet is not treated as part of her estate for IHT purposes as long as she survives for seven years. As long as the property is her principal private residence there will be no CGT to pay.
Practical Tip:
It may be necessary to consider more than one tax when making a gift or property. The tax consequences will depend on the circumstances.
