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Transferring & Gifting Properties

There are two ways to dispose of your property. One way is to sell the property and the second is to gift it away.

The method of gifting is referred to as lifetime transfers or lifetime gifts.

The rules and guidelines surrounding transferring/gifting are very complex and you should consult a tax specialist if you find yourself in this position. In this chapter we will address in general the issues that can arise when you decide to either gift / transfer a property.

Why properties are gifted

The two primary reasons for gifting property are to minimise your tax liabilities and to make another person, e.g. your spouse, wealthier.

By reading through the remainder of this chapter you see not only how it is possible to reduce your tax liability during your lifetime, but how you can also reduce the inheritor’s liability!

Gifting to Minimise Tax Liability

If you are gifting to minimise your tax liability, then you will be doing so to reduce your Income Tax and/or CGT liabilities. Situations when you will consider transferring property are as follows:

• You are letting your property and you are a 40% taxpayer. Your spouse does not work so if you transfer the property into their sole name, they will be able to make use of their annual Income Tax allowance before any tax is calculated. Even if the income generated from the property is greater than the personal allowance your partner will not be taxed at 40% until the upper threshold is breached.

• You want to sell your property and have already used your CGT allowance for the year. Your spouse has not used the allowance so by transferring the property you can reduce the amount of CGT paid.

• Your want to sell your property but have already used your CGT allowance. On the other hand your spouse has made a capital loss i.e. on shares or property. By transferring the property into the name of your spouse you can offset the gains from your property against losses. This means that you could possibly have a zero CGT liability.

• If you foresee divorce, bear in mind that, whereas asset transfers before divorce are CGT free, such transfers after divorce will not be exempt.

Example: Transferring property to reduce CGT

Mr Jo Jaffa realises that if he sells his property he will be liable to pay tax at 40% on a £30,000 gain, which equates to £12,000. His wife has some shares that she purchased and is currently sitting on a £35,000 paper loss.

Mr Jo Jaffa decides to transfer the property into the name of his wife. Mrs Jo Jaffa firstly sells the shares to register the £35,000 loss and then she sells the property and has a gain of £30,000. There is no tax to pay as it is offset against the loss.

This means that Mr and Mrs Jo Jaffa have saved £12,000 in CGT, just by transferring the property!

Strategies for Gifting/Transferring Properties

Property tax specialist, Colin Davison, offers the following advice for those who are considering transferring properties to minimise their CGT liabilities.

Realise other capital losses

If capital losses are expected in the near future, wait to transfer the property until the tax year in which the capital losses crystallise, so as to offset one against the other.

Of course, if the capital losses have already been realised then consider transferring the same year so that you can offset both the losses and also use your CGT allowance for the same year. For example, if you wait to transfer the following year then you will have missed out on a year’s worth of CGT allowance.

Switching ownership to maximise lower tax band

Wait to transfer the property until a tax year in which income is low, so as to utilise the 20% band for CGT, instead of paying CGT at 40%.

Also, don’t forget that married couples can freely transfer ownership between each other, so consider apportioning the property ownership split so that most of the tax is paid at the lower rate. For example, if your wife is a lower rate taxpayer then she could have a greater split (i.e. 75:25, which means tax at a lower rate!).

Example: Transfer property to utilise lower rate tax band

Mr & Mrs Jo Jaffa are a very successful young couple, who are working full time and are both higher rate taxpayers. They have a property in joint names, which is generating £4,500 monthly net rental income on which they both pay 40% tax on their share of profits. The property was purchased in June 2000 for £110,000.

They are planning a family, and have decided that when this happens Mrs Jo Jaffa will give up work to become a full-time mother.

Eliminating Income Tax

When nature takes its course in 2003, Mr Jo Jaffa transfers his half of the property into the sole name of Mrs Jo Jaffa. This now means that she is the sole owner. However, more importantly, there is no 40% tax to pay on the rental income as it is absorbed by her income tax allowance.

This means that just by transferring the property they have saved £900 per annum in tax. This is because Mr Jo Jaffa no longer has property related income. However, they have actually saved £1,800. This is because £900 is due to the transfer and £900 due to Mrs Jo Jaffa giving up work.

Eliminating CGT

However, in April 2003 after their last tenant moves out, they decide to sell the property, and have it valued at £150,000. This gives them a net gain of £40,000.

In order to reduce the CGT liability, they transfer the property back into joint names where Mr Jo Jaffa owns 21.25% of the property and Mrs Jo Jaffa owns the remaining 78.75% of the property.

They are only liable to pay CGT on £38,000 (95% of this gain due to non-business taper relief)

Mr Jo Jaffa therefore has no CGT liability as his 19.75% share equates to £8,500 (21.25% x £40,000), which is fully absorbed by his personal CGT allowance.

Mrs, Jo Jaffa is also able to use her personal CGT allowance on her gain of £31,500 (78.75% x £40,000). This means that she is liable to pay CGT on £22,700 (£31,500 - £8,800).

Therefore she will be taxed at:

- 0% on £5,035 = £0
- 10% on £2,150 = £215
- 20% on £15,515 = £3,103

This means that Mr & Mrs Jo Jaffa have a joint tax liability of £3,312 on a £40,000 capital gain and a £4,500 rental income.

They have saved over £2,500 in tax just by transferring and splitting the property share ownership in this fashion. This is when compared to a 50:50 split.

Key Tip

1. Consider switching ownership to spouse if they are unemployed!

2. Transfer a sufficient amount to the spouse to use their annual exemption by splitting the property share ownership

Utilise annual exemptions – transfer in stages

If you need to transfer ownership to anybody except your wife, then you should consider transferring in stages so that you can use your annual CGT allowance. By doing this over a number of years you could eliminate most of or even all of your CGT bill.

Example: Transferring in stages

Mr & Mrs Jo Jaffa buy a terraced property for £35,000 in 1997. Their plan is to gift the whole property to their son in six years time when their son reaches the age of 21.

However, in 2000 (three years later) the property is valued at £70,000 and they realise that if property prices continue to increase then they will have a large CGT liability if the whole amount is transferred. This is because they are higher rate tax-payers.

To avoid any CGT liability they decide to start transferring the capital gain in stages as soon as he turns 18 in the year 2000. By using their annual CGT allowances, they can roughly transfer £17,000 to their son on an annual basis.

By the time he turns 21, they have transferred £51,000 of capital gain on the property to their son without any CGT liability. They have the property revalued and it is now worth £80,000.

Because their profit on the property is £45,000 (£80,000 - £35,000) they can now stop transferring the property and give their son full ownership. This is because they have fully transferred their capital gain, and have no CGT liability.

Had they transferred the property in one lump sum then they would have a sizeable CGT bill!

Key Tip

If you will be gifting to your children then consider gifting in stages and as soon as they turn 18.

Gifting on Death

If you are gifting on death, your solicitor will read through your will and disperse your estate as you have instructed. No tax considerations will be taken. The important point to note here is that if your inheritor has any tax liability outstanding, due to the inheritance, then this must be paid before the estate is handed over!

Don’t lose your PPR!

As we have seen in various chapters/sections throughout this book, it can be very beneficial to set up a property in joint names, or move it into joint names to save on tax.

Key Tip

However, one golden rule to take into account is that if a property has been your previous PPR, then it may not be advantageous if you gift/transfer part of your ownership to a person who cannot claim PPR when it is sold.

Inheritance Tax (IHT)

When you gift an investment property, the key tax that the person inheriting the property will incur is Inheritance Tax. Inheritance Tax (IHT) is a combined gift tax and a death duty. The inheritor is only liable to pay IHT when you die, unless the recipient is a discretionary trust, where there can be a lifetime IHT liability.

The HM Revenue & Customs states that:

‘More than 96% of estates do not have to pay any inheritance tax, because they are below the threshold’.

The current threshold is £285,000. This means that the first £285,000 of an individual’s inheritance is free from IHT. Any value above this amount is charged at 40%.

Example: No IHT liability

Mr Jo Jaffa has properties worth £200,000 and a cash balance of £50,000. This means that the value of his estate is £250,000. He passes away in May 2005 leaving the whole estate to his son Jo Jaffa Junior.

There will be no tax liability here for Jo Jaffa Junior, as the £285,000 limit has not been breached.

Don’t forget that Jo Jaffa Junior will still be liable to pay CGT if he disposes of the property at a higher value than he inherited it at!

In the 2006 Budget, Gordon Brown announced an increase in the Inheritance Tax nil rate band to £325,000 from the current £285,000 over the next three years – amounting to a four percent annual increase.

But despite the increase, the move is likely to have little impact with annual house inflation running above four percent anyway.

More pages

Page 1:
Page 2: Why should I plan for IHT now?
Page 3: Potentially Exempt Transfers (PETs)