Fair Rents (Scotland) Bill or Artificial state manipulation of free market rent?10:34 AM, 6th November 2020
About 3 weeks ago 36
Gifting property to families or loved ones without triggering a cluster bomb of taxes is never simple.
Take two sisters who inherited a property from mum and dad.
One of the sisters lives overseas and has no children while the other lives in the UK and has a son with a young family who need somewhere to live.
The inherited property is ideal as it’s close to mum and in the town where the son has a job.
Simple – just transfer the property to him and let the family move in.
The trouble is, tax is not that simple, and the government wants a slice of the action.
First, the sister living in the UK buys out her sister’s share of the property. The ‘date of death’ value was £150,000, so the 50:50 share changed hands at £75,000 – this is lower than the stamp duty threshold, so one tax trigger is defused.
The sister living overseas is exempt from CGT as she is not a UK resident taxpayer – so a second tax trigger is defused. If she lived in the UK, CGT would need considering.
Now, the sister owns all the property and wants to gift the home to her son.
The next tax trigger is capital gains tax for her – gifting a property is a disposal under CGT rules.
To calculate CGT, the sister has to work out the open market value of the property at the date of the transfers between her sister and from her to her son.
CGT is due on the open market value of the disposal less allowances and base cost – the value when she took possession of the property shares on inheritance and transfer from her sister. Providing this was all done within a short time, the value is probably still £150,000.
Next comes the inheritance tax (IHT) trigger on the gift of the property. If the sister dies within seven years of the gift, IHT may apply on a reducing scale, depending on the total value of her estate.
Lastly – watch out for the gift without reservation tax trigger.
Say the sister gifted the property to her son, but instead of living there he rented the property out and she received the rental income until she died as a condition of the gift, then this might be construed by the taxman as a gift without reservation.
This means the sister’s estate retains the property and depending on how her finances pan out, IHT may be due on the current market value of the property on her date of death.
If you would like further advice on tax or accountancy please call The Money Centre’s Customer Care Team on 01603 894525 and we will be delighted to refer you to our Joint Venture Tax Partners who specialise in property taxation. The initial introduction is a no cost no obligation service.
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