Lee Sharpe considers some key tax aspects of property transfers.
--------------------------
For more tips on this important area of business taxation and plenty more business tax tips too, please see our guide: Taxation Of Property Partnerships and Joint Ownership.
--------------------------
This article sets out to cover some useful tax pointers to consider in contemplation of property transfers.
Some ‘Dos’…
Keep in mind that gifts trigger CGT
Perhaps the most common mistake encountered from a capital gains tax (CGT) perspective is to assume that no proceeds means no CGT liability. The default CGT treatment is that a gift or deliberate sale at undervalue should be subject to CGT as if sold for full market value. This approach applies regardless of whether donor and donee are connected for CGT purposes. Gifts (or discounted sales) between spouses or between civil partners are specifically protected, but not gifts between other relatives.
There may be a defence if someone unwittingly sells something for less than it is worth (a bad bargain) or sells at a discount to make a sale, but even these protections are stripped away for transfers between connected parties other than spouses or civil partners.
Report gifts of residential property
Readers should know that there is now a special regime for people to report and pay any CGT due on the disposal of residential property in the UK within 60 days of completion of disposal; and for most landlords this will be in addition to their normal self-assessment filing obligations. Having established that gifts can give rise to CGT, it follows that gifts can trigger this new reporting and payment regime as well.
UK tax residents have to consider only residential property, while non-residents have to report any disposal of UK land or property – even if no CGT is due.
Use the special rule (where possible)
If the timing of the disposal or completion is favourable (broadly orienting around the end of one tax year and the beginning of the next), it may be possible to circumvent this new reporting regime and still account for CGT using only the traditional self-assessment mechanism. It requires being able to file the self-assessment tax return for the just-elapsed tax year of disposal very early in the cycle, and before the new 60-days-from-completion reporting window has elapsed.
Bearing in mind that it can push the CGT payment date back out by as much as an extra seven months, the cashflow benefit may well justify the extra effort in the short term.
Consider IHT on gifts
While less personal wealth would generally mean less exposure to IHT, in simple terms, you are potentially exposed to IHT if and when you do something deliberately so that the value of your Estate (wealth) falls, during your lifetime (assuming we are dealing here with a substantial Estate that is not already under the Nil Rate Band of £325,000). One surefire way to reduce the value of your estate is to give something away or to sell it at undervalue. Here again, transfers to spouses or to civil partners will generally be protected; more widely, lifetime gifts to other individuals will normally cause IHT problems only if the donor dies before seven years have elapsed from the date of the gift. However, gifts to companies or to trusts are often immediately exposed to IHT because they are not individuals.
It is possible to trigger both CGT and IHT on the same gift, simultaneously (although it is in turn often possible to ‘hold over’ or postpone the capital gain).
Consider buying residential property in bundles of six or more
In his spring 2024 Budget, the chancellor announced the imminent demise of stamp duty land tax (SDLT) multiple dwellings relief (effective broadly from June 2024), which has previously allowed the buyer to pay SDLT at rates based on the average price of the dwelling rather than based on the total consideration in a contract – which could easily end up in a much higher charging band.
Note that HMRC has long-standing anti-avoidance legislation that links repeated or fragmented transactions between the same or similar parties that might otherwise be treated as separate. The corresponding regimes for the devolved territories (Scotland and Wales) have similar provision in their respective codes.
As a possible alternative, buying six or more dwellings in a bundle will permit the purchaser to apply the non-residential SDLT rates, which will often prove to be lower than the residential property alternative.
…and don’t’s
Assume that a declaration of trust is ‘just a piece of paper’
Over the years, I have encountered several cases where property owners were quite nonchalant about making a declaration of trust in favour of another party (which would typically state that they were holding some or all of a property on trust for that other party). They sometimes failed to appreciate that each declaration constitutes a disposal of the corresponding proportion of the property to that other party by way of gift. Here again, the absence of proceeds does not prevent a disposal from taking place for CGT purposes.
Furthermore, where such property is subject to a mortgage, the contractual terms may require that any new co-owner be made party to the mortgage as well. Their accepting liability in the mortgage may, in turn, constitute valuable consideration for the purposes of determining liability to SDLT (or devolved equivalent) despite there being no proceeds. This applies to gifts generally and not just in relation to declarations of trust. There is no special protection for transfers to spouses or to civil partners.
Rely on so-called ‘minimum periods’
In a similar vein, I have sometimes been asked, how long does someone have to:
-
live in a property before HMRC will accept it is their main residence and potentially exempt for CGT purposes when later disposed of; or
-
subsist in a partnership (usually a limited liability partnership) before HMRC will let them incorporate the business exempt from SDLT?
To which the snap answers are respectively:
-
Quality of occupation – demonstrable intention to occupy on a reasonably substantive and long-term basis is more important than the length of occupation, which may be subject to unexpected life events like illness, divorce or a change in employment.
-
It could be argued that the second question implicitly assumes it is acceptable to move to a partnership footing primarily to reduce the SDLT that might otherwise arise. The anti-avoidance measures at FA 2003, s 75A would like to have a word (the relevant legislation permits HMRC effectively to ignore a transaction that acts to reduce the amount of SDLT due).
Miss out on capital allowances on fixtures…
Outside of the cash basis, capital allowances are available at up to 100% of the cost of capital items in some scenarios. While fixed assets within a rented-out dwelling are generally ineligible for capital allowances, they are more freely available in respect of:
-
fixtures in commercial premises; and
-
the common parts of multi-dwelling buildings, like blocks of flats or houses of multiple occupation (note that ‘common parts’ differs from ‘communal areas’, the latter potentially comprising kitchens, lounges, etc.)
The value attaching to eligible fixtures in commercial premises (e.g., such as air-conditioning, central heating, sanitaryware, and equipment in canteens, kitchens and lighting systems) can easily exceed 10% of the cost of a commercial property. However, there is a strict process – and a broadly two-year window – that both buyer and seller must observe in order for the buyer to be able to access those capital allowances (and it is often overlooked that there may be consequences for the seller if they refuse to participate).
…or structures and buildings allowance
Structures and buildings allowance has been available for ‘new’ non-residential building projects since October 2018.
Very simply, it covers those parts of a commercial building that the ‘vanilla’ plant and machinery capital allowances above do not. The rate is very low – just 3% per annum on a straight-line basis over circa 33 years – but the qualifying amount on which the claim is based is typically substantial. Even so, I often see recent extensions to ‘old’ buildings where the client (or their adviser) has neglected to claim.
Overlook joint property ownership
The CGT annual exemption has been hobbled from £12,300 to £6,000 in 2023/24 and then to just £3,000 from 2024/25. The logic behind this is very hard to fathom, but it does not necessarily make obsolete the practice of putting property into joint names between spouses or civil partners, comfortably prior to disposal, where the new joint owner may have spare basic-rate band so that CGT is taxable at the lower rate. Just make sure not to undertake transfers too late, when a sale may have been agreed.
Conclusion – Do speak to your adviser before the transaction
One might say that there is no such thing as post-transaction planning, but only post-transaction compliance (or, perhaps optimistically, post-transaction damage limitation). Even experienced landlords are advised to broach prospective gifts, sales or acquisitions with their adviser.
