Jennifer Adams examines what you need to consider when gifting investment properties to your children.
Landlords buy investment properties for a variety of reasons, but at some time or other a decision has to be made as to the disposal of the property. Should the owner wish to gift the property to another family member there are tax implications to consider.
The ‘market value’ rule
The more immediate consideration is capital gains tax (CGT). Unless the owner of the second property has made an election for principal private residence (PPR) relief to apply, CGT may be payable on any capital gain arising (depending upon the availability of the annual allowance). The CGT would be calculated based on the value uplift between the date of purchase of the property and the date of the gift, the market value being the deemed 'sale price'.
The CGT is payable by the donor, being the person who made the gift. The tax rate will depend on the donor’s income – basic rate taxpayers paying 18%, rising to 28% for higher rate taxpayers, based on current tax rates for residential property investments. Different rates apply for property sold in Scotland or Wales, or for commercial properties.
Stamp duty land tax etc.
Stamp duty land tax (SDLT) (or its equivalent, in Scotland or Wales) will also need to be considered. SDLT is only paid on the consideration given, not on the equity in the property transferred; so if the transfer is a pure gift with no consideration, no SDLT is payable.
However, this is only the case if there is no outstanding mortgage on the property. 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 (under the Covid-19 'temporary rules' this amount is currently £500,000).
The main problem in this situation is that should any of the children buy a new home or sell an existing home and buy a replacement in the future, he or she will be subject to the additional 3% SDLT surcharge on the basis that they already own a share of an existing property.
Many landlords transfer property to their children for inheritance tax (IHT) planning reasons. To take advantage of the IHT rules, the property must be gifted outright with no 'reservation of benefit' and the donor must survive at least seven years. Should these conditions not be fulfilled, the value at the date of the gift has to be included in the estate of the deceased. To counter this possibility, insurance should be arranged.
The 'gift with reservation of benefit' rules apply in situations such as where the donor signs over ownership but remains living in the property rent-free, as this would mean that he/she 'reserves' the right to benefit from the property. One way round this is for the donor to pay full market rent to the children, and although this will mean that the children will be liable for income tax on the rent paid, a proportion of their expenditure on rates, insurance and repairs will be deductible.
Alternatively, both the donor and donee could own the property jointly, living there for some period of time and both sharing the running costs.
Beware of gifting assets to reduce capital in the belief that by doing so the value remaining qualifies the donor for care funding purposes. If the local authority believes that assets have been intentionally reduced to increase the chances of getting financial support, it may regard this as a ‘deliberate deprivation of assets’ and include the property in the calculation when assessing the ability to pay for care after all.