Swapping Or Gifting Interests In Property – CGT Issues

‘Swapping’

An example of a ‘swapping’ type of property transaction is where two or more persons own two or more properties jointly and they swap ownership such that each owns one property.

What is a ‘gift’?

HMRC’s Helpsheet HS295 (‘Reliefs for gifts and similar transactions’) defines a ‘gift’ as having being made ‘If a person transfers an asset to another person for nothing...and is a disposal otherwise than by way of a bargain at arm’s length’ (www.gov.uk/government/uploads/system/uploads/attachment_data/file/384038/hs295.pdf).

A gift must have been intended to be a gift, must actually have been made and accepted by the recipient. There will be a capital gains tax (CGT) charge, the ‘proceeds’ figure used being dependent upon whether the parties are ‘connected’. A jointly owned property could be gifted to the other owner with no consideration in return.

Capital Gains Tax calculations use either actual proceeds or market value (MV), with MV applying to any transaction not at ‘arm's length’. Transactions between connected parties are automatically assumed not to be ‘at arm's length’ so the MV automatically applies. Transactions between non-connected persons are generally deemed to be ‘at arms-length’ and as such MV may not necessarily apply.

‘Connected’

The definition of the term ‘connected’ persons is to be found in the CGT legislation (at TCGA 1992, s 286), which states that an individual is connected with:

• his spouse or civil partner;

• his relative;

• the spouse or civil partner of his relative or

• the spouse of civil partner of his spouse or civil partner’s relative.

‘Relative’ means brother, sister or, lineal descendants.

Capital gains tax reliefs

A CGT charge can be deferred in specific circumstances under a claim for ‘roll over’ relief (TCGA 1992, s 165, Sch 7).This section is usually used to defer gains on the transfer of business assets however, TCGA 1992, ss 248A–248E provides for a broadly similar form of relief in situations where ownership of jointly owned properties are swapped.

A claim for this relief avoids an immediate CGT charge for the donor, the donee taking over the donor’s CGT base cost which increases any gain on the eventual sale.

Should the value of the properties not be equal, the party who receives the lower value property can claim the relief, and the balance will be subject to CGT.

Example 1 - Unequal property values

John and Harry jointly own two houses which together are worth £400,000. However, one house is worth £250,000 and the other is worth £150,000. They decide to swap interests such that Harry owns the higher priced property and John owns the other, lower priced property. To equal the value Harry will need to make a payment of £50,000 to John. This transaction will produce an immediate partial CGT charge as consideration will have been given. The balance can be subject to a ‘roll over’ claim.

A claim is also possible should a property be owned in unequal proportions, the resulting exchange needing to be in proportion to the share of assets owned.

Example 2 - Unequal property interests

John and Harry own three properties each having a market value of £100,000. John owns 1/3 of each property and Harry the balancing 2/3 share. An exchange of properties giving the 1/3 owner one property and the 2/3 owner two properties would be possible.

HMRC guidance on the relief for exchanges of joint interests in land is included in its Capital Gains manual (at CG73000 and following). The conditions for the relief must be followed carefully.

Inter-spouse transfers

The situation for inter-spouse/civil partner transfers is that a disposal for CGT purposes still occurs but rather than being at MV (as would normally be the situation between ‘connected’ persons), the transaction takes place at a ‘no gain/no loss’ value (assuming that the spouses are living together) (TCGA 1992, s 58(1)). The transferee spouse acquires the interest in the property at the original cost to the transferor spouse at the date of transfer.

Importantly, the transfer must be an outright gift with no conditions attached. The transferring spouse must not continue to have control of the asset or derive any benefit after the transfer, otherwise the ‘settlements’ anti-avoidance provisions may be in point (ITTOIA 2005, s 624(1)). A ‘settlement’ is defined widely for those purposes as including ‘any disposition, trust, covenant, agreement, arrangement or transfer of assets’ (s 620).

However, there is nothing to stop the receiving spouse returning the gift at a later date, leaving it to them in a will, or making another different gift later on. Care needs to be taken in planning as such transfers could be challenged by HMRC under the Ramsay anti-avoidance principle, which broadly decided that the courts must look behind the individual steps of a transaction to ascertain the legal nature of the series of transactions as a whole.

Although spouses are ‘connected’ persons for CGT purposes, transactions between them are not considered to take place at MV unless they are divorced or their civil partnership is dissolved. If the parties become permanently separated during the year, the relief continues to apply to transfers made between them until the end of the tax year.

Main residence relief and inter-spouse gifts

Where both parties own a property only one residence can be deemed the main residence, qualifying for PPR, at any one time. However, there is a planning opportunity should an inter-spouse transfer take place. The ‘no gain/no loss’ principal still applies but there is an added advantage, i.e. that the transferee spouse’s period of ownership is deemed to commence not at the usual date of transfer but at the date of the original acquisition by the donor spouse. Furthermore, any period during which the property was the main residence of the donor spouse will also be deemed to be the main residence of the receiving spouse. In other words, the transferee spouse stands in the place of their other half.

In order for this ‘backdating’ to apply, they must be married and living together at the date of transfer, and the property in which the interest is being transferred must be the couple’s sole or main residence.

Example 3 - Gift of rental property

Stephen owns a rental property which he has never used as his main residence. He marries Anne and moves into her house. Stephen rents his property out. Normally on sale there would be a CGT charge (less annual CGT allowance after letting relief).

However, instead of selling he gifts the property to Anne. Anne elects for the property to be her main residence. The transaction is deemed to have taken place at the date of the transfer and at the usual ‘no gain/no loss’ basis. However, the second condition for ‘backdating’ does not apply such that the entire capital gain is exempt on sale, because the property qualifies as Anne’s main residence throughout.

Practical Tip:

Should such a transfer between spouses be envisaged, it is suggested that the property be used as the couple’s main residence for a reasonable period before sale, paying full council tax, arranging for mail to be delivered rather than redirected, using the property for weekend visits etc., in order to confirm the main residence status of the property.