Getting the property back out of my estate?

Getting the property back out of my estate?

9:56 AM, 27th June 2022, About 3 months ago 22

Text Size

In 2009 my son-in-law got into financial difficulty and I repaid all debts and the mortgage on their property and took ownership of their home allowing them to remain in the property rent-free. At the time I paid 209k for this property.

I now wish to get the property out of my estate and gift the property to my daughter. This is valued today at approximately 400k. I understand if I gift this property there is likely to be a CGT liability on the increase in the value of the property between the 2009 acquisition and today’s date namely a taxable profit of 191k.

I wondered if there is a legal way to eliminate or indeed considerably reduce the tax liability on this gift. We have explored the costs and implications of putting the property into a trust and also considered leaving it in our estate neither have worked out as a Realistic option and would end up costing more.

The gifting would be our favourite route but we would like to reduce the tax liability. We would welcome any suggestions.

Many thanks

David



Comments

Mark Alexander - Founder of Property118 View Profile

10:17 AM, 27th June 2022, About 3 months ago

This is a tough one.

If you are married there may be a way to utilise the annual CGT exemption allowance of your spouse.

A more extreme option would be to become resident overseas for a least five full tax years. This would increase your base cost for CGT calculation purposes to the April 2015 value of the property.

If we could turn back time there would be lots more options.

Grumpy Doug

10:58 AM, 27th June 2022, About 3 months ago

Subject to your age, health, and other disposals that may be subject to CGT, you could transfer a proportion of the property per annum. Assuming that you can initially transfer 50% to your spouse (someone please correct me that this can be done free of SDLT), then you have a joint CGT allowance of approximately 25k which equates to 1/8 of the capital gain to date. Therefore you can transfer it over in 1/8 chunks (approx 55k p/annum at today's valuation). A lawyer can sort out the TR1 transfer for you plus an appropriate declaration of trust which you can then rinse and repeat on an annual basis.
Given that your CGT exposure is currently 55k, each year of partial transfer will save you about 7k of CGT.
Usual caveats apply - I am not an expert, please take professional advice!

David Smith

12:12 PM, 27th June 2022, About 3 months ago

Possibly you could permanently rent out the property and then enter into an LLP with your daughter and then re- finance the property so your daughter can buy her own home.

Alex View Profile

14:02 PM, 27th June 2022, About 3 months ago

Reply to the comment left by Grumpy Doug at 27/06/2022 - 10:58
Grumpy Doug's suggestion is probably the easiest solution. If there is no mortgage on the property then transfer of 50% to your spouse will not incur SDLT. Then, ask your solicitor to make annual transfers of value within (both) your annual CGT allowance(s).

Pamthomp33

15:55 PM, 27th June 2022, About 3 months ago

Reply to the comment left by Grumpy Doug at 27/06/2022 - 10:58
Surely, each time you do a transfer though, there would be legal fees involved? This is something I have often wondered about whether you can gradually transfer ownership to your children without the CGT sting in the tail for doing so?

Alex View Profile

17:03 PM, 27th June 2022, About 3 months ago

Reply to the comment left by Pamthomp33 at 27/06/2022 - 15:55
Yes, engaging a solicitor will incur legal fees.

Grumpy Doug

6:43 AM, 28th June 2022, About 3 months ago

Reply to the comment left by Pamthomp33 at 27/06/2022 - 15:55I am doing just this with my current rentals, transferring them to my sons over the next 11 years. £750 approx in legal fees in year 1 and then about £300 in each year afterwards. A tiny fraction of the CGT.
As Alex says, they need to be mortgage free to do this as described. I'm transferring approx £100k of equity per annum at the moment.

Tim Rogers

9:10 AM, 28th June 2022, About 3 months ago

The idea of transferring ownership in sections over time had not occurred to me. I have a property that will never get to energy band 'C' occupied by long term disabled benefits tenants whom I have known as friends for over 35 years, long before they became tenants. I am minded to gift the property to them.

I have 3 questions if folks could give their thoughts/knowledge I'd be grateful.

1). What would happen to the rental element once you started transferring ownership, remembering we would be dealing with the local council benefits system?

2). what happens about the further increase in value of the property over the transfer period.

3). The property is currently owned jointly with my wife, (50/50), giving a CGT allowance of £24,600. The property has a gain of £155,000 over a start base of £125,000, any advice as to the size of the annual transfer to avoid tax would be appreciated.

Alex View Profile

9:49 AM, 28th June 2022, About 3 months ago

Reply to the comment left by Grumpy Doug at 28/06/2022 - 06:43
Hi Doug
It sounds like an incredibly 'blunt tool' to achieve your stated aim. Apart from anything else, you are foregoing your right to 100% of the income from the properties and your strategy is very lengthy and cumbersome.
There are far better strategies available to you. I strongly recommend that you book a Property118 Tax Planning Consultation >> https://www.property118.com/tax/book-a-consultation/

Grumpy Doug

13:38 PM, 28th June 2022, About 3 months ago

Reply to the comment left by Alex at 28/06/2022 - 09:49
Thank you for your response Alex. I am aware that my strategy is not for all, but time is (hopefully) on my side so the period of transfer should negate IHT issues for me, my wife and the kids. Re retention of income, I am utilising the first exception below :-
The gifted interest is a GWR unless one of the following exceptions apply (FA 1986, s 102B(3), (4)):
* The donor does not occupy the land; or
* The donor occupies the land to the exclusion of the donee for full consideration in money or money’s worth (e.g. a full market rent); or
* Where (such as in the above example) father and son both occupy the property, and father receives no (or negligible) benefit from his son in connection with the gift (e.g. the property expenses are shared between them).
I have a detailed annual declaration of trust that covers the equity transfer and the retained income. Not for the fainthearted but I'm happy with my strategy.

1 2 3

Leave Comments

In order to post comments you will need to Sign In or Sign Up for a FREE Membership

or

Don't have an account? Sign Up

Landlord Tax Planning Book Now