My wife and I jointly own a second home in London, which we rent out. We built it for £60,000 in 2003 on land we owned. We live abroad but it was our main residence for about five years. The current value is around £400,000. It is our intention to add our sons to the title or replace our names with theirs. Which is the most tax-efficient way this can be done for capital gains purposes (we hope to live at least another seven years to escape inheritance tax)? 

Arthur Weller replies:  

Adding your sons to the title or replacing your names with theirs is, in effect, gifting to them. This will trigger capital gains tax (CGT) for you and your wife since, presumably, £400,000 is more than the sum of the value of the land in 2003 + £60,000. You will be entitled to main residence relief from CGT for the five years that you lived in it, plus the last nine months of ownership. You state that you live abroad. If you are non-UK tax resident, you will only be subject to UK CGT on the increase in value from April 2015 onwards. (It also makes a difference if you are non-UK tax resident for five consecutive tax years). You ask for 'the most efficient way' to transfer. From a CGT perspective, it is most efficient to transfer a percentage of the property each year using your CGT annual exemption. However, this is not practical because: (a) the value of the house is likely to rise; and (b) you need seven years before you die to avoid inheritance tax. There is another option of transferring to a trust using gift holdover relief for CGT purposes, but this needs careful consideration in advance.