Insights

Often when clients approach us for inheritance tax planning advice, they are considering making a lifetime gift of either cash or property in order to reduce the value of their estate on death, and hence reduce the inheritance tax liability arising on their estate.

Where cash is being gifted, the tax implications are relatively straight forward. However, where gifting property is concerned, the tax implications are far more complex; it is never as straight forward as simply making a gift of property in order to reduce the value of your estate for inheritance tax purposes, as will usually be the case when gifting cash. This is because in the case of property, not only is it necessary to consider the inheritance tax (IHT) implications, but also capital gains tax (CGT) and stamp duty land tax (SDLT).

The inheritance tax position

In many ways, the IHT implications can be the most straight forward - if you make a gift to another individual this will be a potentially exempt transfer (PET) which will fall outside your estate completely once you have survived for 7 years following the gift. This applies equally to property and to cash. So far, so good.

Is the gift in fact valid for IHT purposes?

This issue often arises when considering gifting property – will the gift in fact reduce the IHT liability? The point to be aware of here is that in order to be effective for IHT purposes, a gift must be exactly that – i.e. an outright gift with no strings attached or, in HMRC language, there must be no ‘reservation of benefit’. Therefore a gift of property is not effective if you continue to live in that property, or spend holidays there, unless for example, you ensure you pay the full market value for your use of the property.

There are also rules in place which prevent you from obtaining benefit from a gift in a ‘roundabout way’, for example by gifting property to your adult child on which he then raises a mortgage and gifts cash to you.

The capital gains tax position

CGT is not relevant when a gift of cash is made, but the situation is very different when you gift property. This is because property is a capital asset to which CGT applies, and it is often overlooked simply because the position appears so inequitable.

Essentially, if you make a gift of property to a person who is ‘connected’ to you, so your adult child for example, the legislation entitles HMRC to substitute the open market value of that property for actual consideration. Therefore at the time of making a gift of property it is necessary to calculate any capital gain arising as if you had disposed of the property at its open market value and to report the gain to HMRC on your self assessment, paying any capital gains tax liability arising. This appears inequitable because of course you will not have received any consideration.

There are however two points which should be borne in mind:

1. The base cost of the property for CGT purposes for the person receiving the gift, when they eventually sell the property, will be the open market value at the time of the gift on which you have reported your capital gain; and

2. Transfers between husband and wife and civil partners do not fall within the CGT charging regime – they are made on a no gain/ no loss basis.

Finally - don’t forget SDLT

A person acquiring property needs to pay SDLT when they give anything of monetary value in exchange for that property.

If property is gifted outright, then often no SDLT will arise. However if the property is mortgaged and the person to whom the gift is made also takes over that mortgage, this will be consideration for SDLT purposes.

What these points highlight is the complexity surrounding HMRC’s treatment of property; transferring property ownership or simply adding another person to the deeds is likely to give rise to tax liabilities, and advice should be taken before proceeding.

If you would like to discuss any aspect of property tax planning in detail please contact Lesley Stalker by emailing las@rjp.co.uk.