How to use CGT allowance when you don’t sell your properties?

by Readers Question

9:10 AM, 28th April 2017
About A year ago

How to use CGT allowance when you don’t sell your properties?

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How to use CGT allowance when you don’t sell your properties?

I have never used my CGT allowance as I thought you needed to sell a property to use it. Someone has told me though that it can be used by putting it each year into trust for your children. My understanding is that you have to allocate it to a particular property. Is it the case then that if I have a house which originally cost £100,000 and now costs £200,000, and I allocate my and my husband’s allowances of £22,000 each year, then in under 5 years there would be no CGT to pay?

Another question: if I don’t do this and just wait till I die, would there be CGT and inheritance tax to pay on that property (and others)? If so, I imagine most of the gain would be wiped out, after I have used my inheritance tax allowance on my other assets.

Also: if I do allocate the CGT in this way, does it mean that my children would have to have the pro rata income from the rentals on the allocated property or properties?

I know I will have to speak to an accountant and solicitor about this and get things done professionally, but I prefer to understand more of it beforehand as I have been stung in the past by an accountant’s advice and it is partly because of that that I haven’t acted sooner (as well as the fact that I had no idea the CGT allowance could be used in this way).

I’m also wondering what any drawbacks might be to this plan. If anyone understands this or maybe has arranged something similar themselves, I would appreciate any advice.

I know I will also have to do some IHT planning, but I do not want to lose control of my assets by putting properties into trust at this stage so am not currently sorting this. Also I don’t trust advisers so aim to be as self-sufficient as possible.

Many Thanks

Linda



Comments

Neil Patterson

9:59 AM, 28th April 2017
About A year ago

Hi Linda,

Mark is out with consultations at the moment, but yes you are correct you will need professional guidance at some point.

However at first glance I think you have a fundamental assumption incorrect which may help. If your beneficiaries do inherit your estate then there is only IHT to pay and not CGT. A double whammy would be very harsh!

Monty Bodkin

10:46 AM, 28th April 2017
About A year ago

The annual CGT allowance cannot be carried forward to future tax years.
Very happy to be proved wrong!

Thiru Vasagam

11:31 AM, 28th April 2017
About A year ago

The CGT Allowance for 2017/18 Tax Year is £11300 per person. This changes every year normally rising. This allowance cannot be accumulated or carried forward it can only be used in the year that the Capital Gains is incurred.

Mark Alexander

13:15 PM, 28th April 2017
About A year ago

Hi Linda

Whilst I agree with everything others have said, they are not thinking outside of the box, which is what I do for a living. I can help you with this.

A transfer by way of gift crystallises a capital gain. Based on the example you have given, just suppose you were to gift 20% of the beneficial interest in your £200,000 property to your children. The gift would be under £40,000 and wouldn't be subject to SDLT.

You would have crystallised 20% of your £100,000 gain to date, i.e. £20,000.

Between you and your husband you have £21,600 of annual CGT exemption allowance to offset this gain against.

After 5 consecutive years of doing this your family would own the entire beneficial interest.

You can do this regardless of whether there is a mortgage on the property, by transferring beneficial interest using a Declaration of Trust.

If you survive for 7 years after the gift there are no IHT implications either.

Neil Patterson is right about the CGT clock ceasing at death. That isn't a strategy we recommend for avoiding CGT though!

What you cannot do though is reserve any of the benefit. Therefore, if the property is rented, the beneficial ownership you have gifted will include the rent and any pro-rata expenses. However, if you were to form a partnership with the beneficiaries you could agree to allocate profits disproportionately to ownership. You could also take drawing disproportionately to both ownership and allocation of profits. In other words, you could continue to draw all the money even though all the profit is allocated to your children. When you eventually pass away you will have a debt to the partnership which will be part of your estate, thus reducing your IHT.

I can get the beneficial transfers done for you with Cotswold Barristers for £250 + VAT each.
.

Marlena Topple

13:52 PM, 28th April 2017
About A year ago

Mark could you gift say 40k a year to the same child up to the value of the property?
Thanks

Mark Alexander

14:12 PM, 28th April 2017
About A year ago

Reply to the comment left by "Marlena Topple" at "28/04/2017 - 13:52":

Yes

You must not rely on this as advice though. You are not a client of mine which means I have not completed due diligence. The above is information has been given for indicative purposes only.
.

Lucy Fryer

14:13 PM, 28th April 2017
About A year ago

Hi Mark
Can you gift bits of property to your children, if the children are under 18 years old please?
Lucy

Mark Alexander

14:20 PM, 28th April 2017
About A year ago

Reply to the comment left by "Lucy Fryer" at "28/04/2017 - 14:13":

You can hold properties in trust for children, it that is what you are asking.

Whether you could form partnerships with under 18's is something I would need to look into. I suspect there will be guidelines on that in the HMRC tax manuals but it would take me a fair bit of research to be able to advise in that regard.
.

Puzzler

10:16 AM, 30th April 2017
About A year ago

Hi Linda - it's not clear to me what you are trying to achieve here. If the property passes to your children on death then IHT is payable and if while you are still living then it's CGT. Is your intention to share the tax burden now or reduce IHT later on (or both)?


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