Do I pay CGT if I sell to a friend at minimum value

by Readers Question

8:57 AM, 16th January 2020
About a month ago

Do I pay CGT if I sell to a friend at minimum value

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Do I pay CGT if I sell to a friend at minimum value

I know that if I sell a property (never lived in it) to my son for what I paid for which was £49k and it is worth £175k that it will be treated as a gift and as such Capital Gains Tax (CGT) will be payable and IHT will also come into it.

However, if I sell it to a friend for £49k who is no relation to me at all (and I understand the risk of him then owning it, so do not need this pointing out) is it still treated the same for CGT purposes as being sold under value?

The friend would live in it for 12 months or so as his main residence (he currently has no main residence or buy to lets) and then sell it on open market and at a point in the future would give my son any profit made, keeping a little for himself.

Many thanks

Jackie



Comments

Mark Alexander

10:54 AM, 16th January 2020
About a month ago

Hi Jackie

Be very careful here, what you are suggesting above could well be construed to be tax evasion, the maximum sentence for which is seven years in prison and an unlimited fine.

Not only that, your friend would be complicit in the crime if he were to sell the property at market value and give the money back to your son, especially if he keeps some for himself.

If he sells the property and keeps all of the money, no crime will have been committed by either of you. However, you and your son especially will be very much out of pocket.

You MIGHT get away with it, but I certainly wouldn't recommend that you try. same advice as I would give to you if you had said you were planning to Rob a Post Office really.

Sorry!

Nick Pope

12:12 PM, 18th January 2020
About a month ago

Bear in mind also that Stamp Duty Land Tax would be payable - the amount your friend actually pays doesn't matter, the tax is payable on the value at the time of transfer. If a price appears to be artificially low the matter will be referred to the DIstrict Valuer's office.

paul thomason

15:17 PM, 20th January 2020
About 4 weeks ago

Reply to the comment left by Nick Pope at 18/01/2020 - 12:12
why sell . why dont you remorgage on a buy to let , rent it out and give your son a private morgage to buy somethink for him

silversurfer2017

17:24 PM, 20th January 2020
About 4 weeks ago

The other way which is a bit more long winded is make the property tenants in common and gift your son a 10% share. Each year gift a further 10% until your son owns 100%. The annual CGT exemption is approximately £12,000 over 10 years you would get £120,000 in CGT exemption relief which would cut your CGT bill considerably. THIS IS LEGAL.
I am doing a similar thing with a property we bought for £60,000 which is now worth £300,000 and we are using our double exemptions (husband and wife) to transfer a property to my son and daughter in law over a six year period.

Paul Baker

20:53 PM, 20th January 2020
About 4 weeks ago

Reply to the comment left by at 20/01/2020 - 17:24
Hi Silversurfer, I like your suggestion and it got me thinking how that could also save on IHT (although you would need to survive 7 years from each 'gift' of 10%), however when your son eventually disposes of the property he would have to pay CGT on the difference between the market value of the asset at time of disposal and his acquisition costs which are nil so you would be deferring the CGT liability and in fact increasing it albeit he would pay it eventually and not you.
But... if as I suspect, the property is to be his main residence(?), then I can see this working as legitimate way to reduce CGT on the property.

silversurfer2017

7:07 AM, 21st January 2020
About 4 weeks ago

Reply to the comment left by Paul Baker at 20/01/2020 - 20:53
Paul you are not correct is saying his acqusition cost would be nil. His acquistion cost is the true market value of each gift. You would have to value each individual disposal at true market value, and pay a small amount of CGT on each disposal and he would need to add them all up at the end of 10 years. So his first 10% would be £17,500 and his last 10% share might be say £27,500 and overall adding them all up might come to £225,000 which would be his base acquistion cost. If he then sold the property a few years later for say £300,000 then his capital gain would be £75,000.
You can make this a lot easier by doing a double transfer every two years around a tax year end. E.g. 1st transfer 26 March 2020, 2nd transfer 13 April 2020. Just one valuation around 5th April would be close enough for HMRC for both disposals. Next transfers would be March and April 2022. Would not suggest you try and be too clever making one transfer 4th April and next one 6th April. You should be fine with a week or ten days each side of the tax year. You are correct that you would have to survive each individua gift for 7 years to benefit from full IHT exemption. As your CGT bill each year will be quite small you might wish to consider doing this say over 8 tax years. First 4 years at 13%, last 4 years at 12%. You will need a solicitor to draw up Deeds of Transfer for each disposal. Mine cost from memory around £1,000 for the first two, subsequent ones should only be a couple of hundred as the solicitor already has the template set up on their system. If you want to set up in time for the first one in this tax year then don't hang about. Your solicitor will need time to discuss it with you and your son may need independent legal advice unless I think he can sign a waiver. I am presuming the poroperty is un-mortgaged and free of debt. The Land Registry will need to be notified by you solicitor and they can sometimes be a bit slow.
What you are doing in affect by this whole process is making your property equivalent to a shareholding so that you can then just dispose of a percentage each year. If instead of owning this property you had a large shareholding of Greggs shares which you paid £49k for and now worth £175k then disposal would be easy-peasy. Just transfer sufficent shares each year to your son to use up your annual CGT tax free allowance. There are just a few more hoops to jump through with a property.

Paul Baker

12:29 PM, 21st January 2020
About 4 weeks ago

Thanks for the excellent explanation Silversurfer, I agree, you are of course correct, the acquisition cost would indeed be the market value of each gift - apologies I was having an off day!
A fascinating concept and one which seems to make perfect sense. If it is a rental property are you allocating the income/expenditure as per the % split? I believe I read somewhere that you don't have to and it could be shared however you chose between you (although I may be having another off day!) 🙂

silversurfer2017

14:47 PM, 21st January 2020
About 4 weeks ago

Reply to the comment left by Paul Baker at 21/01/2020 - 12:29
Best to split the rental income in proportion to the ownership. If you kept all the income you could fall foul of the Gifts with Reservation rules where you give something away but still continue to benefit. That's the advantage of doing two transfers quite close to the tax year end. If you went on the 10% p.a. basis straddling the tax year you could declare all of the income for tax year 20-21, but for 21-22 you would declare 80% and your son 20%, as if your son had owned 80% since 6th April. This I feel sure that this would be a good enough approximation that the HMRC would accept. It is not a case there is income that hasn't been declared, or any intention to avoid income tax.
I got the wording wrong by the way, when you go to see your solicitor it it not a Deed of Transfer. It is a Deed of Trust, sometimes known as a Declaration of Trust, and is a legal agreement that can be used to specify how a property is held between joint owners.

colette

12:41 PM, 22nd January 2020
About 4 weeks ago

Reply to the comment left by at 21/01/2020 - 14:47
Thanks for your helpful reply. After discussion, I will sell the property to my friend for a lesser amount, taking into account work required to the house etc. He owns no other property and it will be his main residence. There may be a small amount of cgt to pay. At a point well into the future he will sell it and may at that time make a gift to my son of some of the proceeds so I do not feel like Al Capone with regards to tax evasion. With regards to my other properties I had been transferring them into tenants in common up to the annual cgt amount each year with my son, so he now has an interest in most of them. I did this in respect of possible care home fees and rules about tenants in common which apply to care home fees in Wales and how they assess property for care home fee purposes. I had to wait until each mortgage was paid off and do not wish to take out other mortgages now. However, if I do this with the 3 remaining properties left whose mortgages I will have paid off this year, will stamp duty be payable either on the percentage proportion he receives (equivalent to annual cgt allowance) or the whole value of the property? When I did the first lot of cgt exercises prior to 2016 higher stamp duty did not apply to 2nd homes etc.

colette

12:44 PM, 22nd January 2020
About 4 weeks ago

Reply to the comment left by paul thomason at 20/01/2020 - 15:17
Thanks Nick but I have been paying off the mortgages and the last 3 will be done this year. I do not want to take out debt at my age.

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