My wife and I and our two sons run a farming partnership, of which all four are equal partners. We all want to gift one of the farms cottages to my eldest son as he recently married. They will use this as their main residence going forward, as he also runs the farm. They don't own any other property. The cottage was purchased in 1999 as part of the whole farm, at which time it would have been worth around £100,000; approximately £90,000 has been spent on it between 2002 to 2004 upgrading the accommodation and its market value as of today would be approximately £245,000. My questions are: (a) as it is a 'gift' is there any capital gains tax (CGT) liability at all to consider on the difference between the original value plus expenditure and the current value? (2) will there be any inheritance tax (IHT) consideration if my wife or I do not survive for seven years after the gift? (3) does it need to be done as part of trust arrangement, or just a straightforward gift, with the title transferred properly via the family lawyer? We are based in Scotland. 

Arthur Weller replies: 

Look at HMRC’s guidance in the Business Income manual, where it is explained that even though Scottish partnerships are treated differently, nevertheless as far as capital gains are concerned, partnership dealings are treated as dealings by the partners, and not by the firm as such. HMRC regard each partner as owning a fractional share in each of the partnership assets. See also HMRC’s Property Income manual at PIM272100. Any gift is treated as being transferred at today's market value; see HMRC’s Capital Gains manual at CG14530. Since the acquisition value was £100,000, the enhancement expenditure was £90,000, and today's value is £245,000, the total gain is £55,000; and maybe incidental costs of purchase and disposal could reduce the gain of £55,000 further (depending on the use of the cottage since 1999, there may be some capital gains tax reliefs available here - see PIM272300.) Calculating one-quarter of these figures results in disposal proceeds of £61,250 and a gain of £13,750. With regard to IHT, you and your wife have each made a gift of £61,250, and you, your wife and other son have each made a capital gain of £13,750. But presumably each one has a capital gains tax annual exemption of £12,300. A straightforward gift is the best approach here; a trust is not suitable.