Can I gift my investment property to my children
Posted on 17th December 2021
There are tax implications in gifting investment property to individuals (or corporate entities) that you are connected to. You can be connected to someone if they are a direct relative or business partner.
You can gift the legal share in the property to your children or alternatively, you can transfer the beneficial rights to the income arising from the property. This requires the appropriate documentation to be prepared and submitted to HMRC or the Land Registry, depending on the transfer
Income tax Implications:
If the property is rented the rental income will effectively be removed from the donor’s annual income for self-assessment purposes and this income will need to be reported by the done (this can vary in the case of minors and trust structures)
The requirement to submit tax returns on an annual basis exists if you receive rental income from land or property in the UK.
Capital Gains Tax implications:
Connected parties (relatives for example) are subject to different capital gains tax treatment if they gift assets between one another. In this instance, if a property is gifted from father to son there will be a tax charge based on the current market value of the property less the original costs (and capital expenditure). If the property has increased in value during the father’s ownership there will be tax to pay even if the son does not make any payment for the gift.
The son will acquire the asset at market value as of the date of the gift. When he sells the asset that value will be his relevant cost instead of the original purchase price that his father paid for the property.
Inheritance Tax
The value of the property at the date of the gift will remain valid for Inheritance Tax purposes as a ‘potentially exempt transfer’ which means that if the donor dies within 7 years of making the gift the value of the asset will remain within his estate and will be assessable for Inheritance Tax
Transfers into a trust which exceed £325,000 will create a lifetime tax charge for Inheritance Tax at a rate of 20%.
There are various opportunities to mitigate the tax impact of gifting property. Our tax specialists have assisted many clients with Inheritance Tax planning and helped to mitigate these taxes along the way where possible.
The most important point to avoid is potentially creating three different taxes on a gift. For example, a property worth £500,000 could create a potential £380,000 tax charge if it is gifted during the lifetime of the donor and the donor dies within 7 years of making the gift:
Lifetime tax due on the gift:
|
Capital Gains Tax at 28% |
£140,000 |
|
Stamp Duty* |
£ 40,000 |
|
Inheritance Tax** |
£200,000 |
|
Total liability |
£380,000 |
*Stamp duty will apply if the property is mortgaged. Assuming the second property rate applies of 8%.
**assumes the donor dies within 3 years of making the gift and the full rate of 40% is due.
Inhertance Tax Planning
It is important to understand the potential exposure to Inheritance Tax and other taxes and consider the planning as ‘a whole’ in order to ensure that tax planning is carried out effectively. We have worked with many clients who hold investment properties and we have helped them to plan and prepare for tax planning during their lifetime and under the terms of their will.
Please contact us if you would like any assistance with your personal tax or investment properties.
Please remember that each individual circumstance will vary and is not intended to be relied upon for specific advice. The above is for illustrative purposes only.
Questions or queries?
Please do let us know if you have any questions or if you need any further help understanding the rules. – please call us on 01932 564098 or message us here.
Information correct at time of publication
This article was produced in December 2021 – please always check with Fuller Spurling that information is current, up to date and applicable to your situation.
Tagged as: Capital Gains Tax, CGT on sale of homes, Inheritance Tax, Land and Property, Stamp Duty, Tax
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