Tony Granger outlines some important tax implications of a parent gifting an investment property to adult children.
The benefits of someone gifting an investment property to their children can include spreading rental income and reducing inheritance tax (IHT). However, the tax implications of making such gifts should not be overlooked.
Capital gains tax
If (say) a husband transfers a rental property (or a share in a property) to his wife, there is normally no capital gains tax (CGT) payable on the transfer. By contrast, transfers of assets between other persons do not escape CGT. For example, a transfer between a parent and daughter is treated as a disposal for CGT purposes and taxed just like an open market sale.
The tax payable on a transfer to the child would generally be calculated based on the value uplift (gain) between the date of purchase of the property and the date of gift.
The CGT is payable by the donor (i.e. the parent in the above example), being the person who made the gift.
Usually, if CGT is payable and a reinvestment of the gain (not the tax paid) is made into qualifying enterprise investment scheme (EIS) or seed EIS shares, the gain may be deferred. There are also potential inheritance tax (IHT) advantages of EIS and SEIS shares after investing for two years.
Can holdover relief apply to defer the capital gain? Hold-over relief is available where the disposal is a chargeable transfer for IHT purposes, but not a potentially exempt transfer (PET).
Stamp duty land tax
You only pay stamp duty land tax (SDLT) on the consideration given, not on the equity in the asset transferred. If the transfer is a pure gift and there is no consideration, no SDLT is payable.
This is the case so long as there is no outstanding mortgage on the property. However, if the donee takes over any part of an existing mortgage, SDLT is payable if the value of the mortgage is over the SDLT threshold. Make sure the lender knows about the gift.
If the recipient already owns property, SDLT will be levied at the surcharge rate, which is three percentage points above the normal rate for the relevant band.
With the introduction of the 3% surcharge (from 1 April 2016) for ‘second properties’, SDLT is now more of an issue, since the threshold for this is only £40,000 – a figure which could easily be exceeded by a share of mortgage taken over. The 3% SDLT surcharge will also apply to all dwellings purchased by companies.
Since 1 April 2016, the current SDLT rates on properties are as follows:
Chargeable consideration Normal Rate With 3% SDLT surcharge
Up to £40,000 0% 0%
£40,001 to £125,000 0% 3%
£125,001 to £250,000 2% 5%
£250,001 to £925,000 5% 8%
£925,001 to £1,500,000 10% 13%
Excess over £1,500,000 12% 15%
The transfer/gift to the child is a PET and you must survive for seven years for it to be out of your estate. Bear in mind that gifting to the children may increase their own IHT situations.
Transfers to a trust
The gift should be evidenced in writing and the Land Registry entry would need to be changed.
Using a trust for the child (instead of making an outright gift to the child) can keep the property out of your estate and also the estates of future generations. Trust taxation of income can be penal though, with a top rate of 45%. There are different tax issues to consider on the transfer of an investment property into trust, which are not considered in this article.
When considering transferring properties to third parties (or alternatively trusts or companies), ensure all the tax and financial planning bases are covered.
This article was first printed in Tax Insider in September 2018.