Is now a good time to gift property?
During lockdown, Evan and Enid, (both in their mid-sixties and recently retired) had given some thought to their longer-term financial needs and those of their 27-year-old daughter, Emma. Specifically gifting their buy-to-let (BTL) property to Emma.
Following a telephone call with us, the following was ascertained:
- Evan and Enid lived in their mortgage free home in Leatherhead and were “comfortable” and able to do without the annual £12,000 net rent.
- Their BTL in Sevenoaks (also mortgage free) was held jointly. This had been a particularly astute purchase in 2005, costing £200,000 against a Christmas 2019 valuation of £500,000.
- Not having made any lifetime gifts, their total assets were worth some £2,000,000 and both were keen to reduce any inheritance tax (currently c£400,000) arising on their deaths.
Our immediate thoughts
The possibility of giving the BTL to Emma was certainly worth investigating. One problem, however, was that such a gift would trigger a capital gains tax (CGT) bill of some £80,000 (based on the gain of £300,000).
However, we commented that:
- Many institutions believed property prices post COVID-19 would be hit badly. Lloyds Bank were suggesting a worst case drop of 30% and the Bank of England were talking about 16%. Working on an illustrative average of 25% this might reduce the tax bill by some £35,000.
- Of much more interest, however, would be a potential £nil CGT bill should Evan and Enid decide to gift this property into a trust (i.e. not directly to Emma but for her benefit whilst excluding Evan and Enid from any future rental or capital proceeds).
The further good news was:
- That no stamp duty land tax (SDLT) would arise on the gift and no immediate inheritance tax (IHT) would arise on what would represent two sizeable lifetime gifts into trust.
- That the £500,000 of value given today (or £375,000 if a 25% discount were agreed) would effectively drop out of their Estates come 2027 with a resultant IHT saving of at least £150,000. If property prices rose nicely in the coming years, then the IHT saving could be even more.
- It is possible that in this particular case, using a trust might be an intermediate step to getting the property into Emma’s own hands with no immediate CGT charge.
But things to watch out for included:
- It was fortunate that the BTL was mortgage free. Had there been a mortgage, then there would likely be problems with the lender transferring the mortgage and SDLT would be due based on the mortgage value.
- Depending on the type of trust, the SDLT may include a 3% surcharge.
- Depending on the type of trust, the ownership of a residential property may impact Emma’s own SDLT position should she buy a property in her own name in the future.
- The type of trust would also dictate how the rental income was treated and taxed on it and Emma and how much annual administration is involved. This however could be managed.
- Gifting in this way simply defers the immediate CGT liability and the trust will eventually pay CGT on the inherent gain that Evan and Enid did not. Although this will be payable through the sales proceeds received.
- There are other CGT, IHT and possibly wider family implications that may need to be considered.
Gosh – lots to think about!
Evan and Enid were glad they spoke to us – they had plenty of food for thought and wanted to discuss matters with Emma to see what her future plans were and get her thoughts. They felt certain they would have some further questions for us before making a final decision – but were particularly pleased when we told them that we could deal with both the tax aspects and creation of the trust in-house.
To discuss the possible relevance of tax mitigation strategies such as this on your own affairs talk with your usual KR contact or contact us here.
Related news and insights
Subscribe to our newsletters
Our complimentary newsletters and event invitations are designed to provide you with regular updates, insight and guidance.
You can unsubscribe from our email communications at any time by emailing firstname.lastname@example.org or by clicking the 'unsubscribe' link found on all our email newsletters and event invitations.