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HMRC  •  Personal tax  •  Probate and Inheritance Tax  •  Tax Planning  •  Tax Relief  •  Taxation

The Great Property Swap Shop: Gifting and Tax

By RJP LLP on 11 September 2019

This cartoon from the Financial Times provides the inspiration for our latest article about property tax, which remains an enduringly popular topic among taxpayers everywhere.

Gifting property to family members is a well-known inheritance tax planning strategy but less well known is the idea of a property swap. Parents want to downsize and reduce the value of their estate; children need more space….so they swap. Sounds like a good solution to an age-old problem, but as with everything there are tax implications.

Before undertaking a house swap it is essential to take legal and tax advice well in advance. The legal and beneficial interests of the properties (the deeds) will need to be amended accordingly.

What taxes are due on a house swap?

Capital gains tax (CGT) – the fact that this is a swap rather than an outright sale doesn’t affect the CGT position, which is that on transfer of property between connected parties, the market value of that property must be taken into account rather than the amount of consideration actually changing hands. Therefore each property must be considered independently. If the property was a second home, CGT will usually be payable but if the property was always used as a main residence, principal private residence (PPR) exemption should be available and no capital gains tax will be due. It depends on the individual circumstances. If CGT is payable, it will be based on the increase in value minus the annual CGT exemption which is currently £12,000. It will also be possible to deduct the costs of the swap – legal fees, stamp duty and other capital expenditure – from any tax liability. CGT will be payable at a rate of 18% for basic rate taxpayers and 28% for higher or additional rate taxpayers.

Inheritance tax (IHT) – the difference in any value between the properties is effectively a gift unless payment is made based on that difference. Where however there is a difference, this will be a potentially exempt transfer (PET). Unless the person gifting the property dies within 7 years of the swap, no IHT will be due and even if this does occur, the person’s nil-rate band allowance of up to £325,000 will be taken into account. In addition, after three years, the IHT due will reduce with tapering relief. Importantly, once the swap has been made there should be no further benefit retained in the property which has been gifted, or it will be classified as a ‘gift with reservation of benefits’ and this will change the tax position.

Stamp Duty Land Tax (SDLT) – this is more complicated depending on the circumstances. Normally, there is no stamp duty payable on a gift, but there may be a liability if the properties are not equal in value, or if there is a mortgage which is being transferred.  There may also be a surcharge incurred of 3% if one party has another property already.

In summary, it is possible to do a house swap, and this may work very well for some people. However the likely tax liabilities must be borne in mind and before going ahead, we recommend taking professional advice and also investing in a property valuation from a RICs certified chartered surveyor. Then, if in the future HMRC does question the transaction, you will have a reliable valuation of the property for tax purposes.

For personal tax planning and inheritance tax advice, contact partners@rjp.co.uk. In addition, RJP LLP is authorised by ICAEW to provide a full probate service.

Get in touch for more details.

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60 Day Deadline for CGT Returns and Tax Payments

If you sell a property and incur capital gains tax on the transaction, you will need to file a tax return and also pay any tax that is due within 60 days of completion, or penalties will arise. Need help with your property taxes? Talk to us.

This cartoon from the Financial Times provides the inspiration for our latest article about property tax, which remains an enduringly popular topic among taxpayers everywhere.

Gifting property to family members is a well-known inheritance tax planning strategy but less well known is the idea of a property swap. Parents want to downsize and reduce the value of their estate; children need more space….so they swap. Sounds like a good solution to an age-old problem, but as with everything there are tax implications.

Before undertaking a house swap it is essential to take legal and tax advice well in advance. The legal and beneficial interests of the properties (the deeds) will need to be amended accordingly.

What taxes are due on a house swap?

Capital gains tax (CGT) – the fact that this is a swap rather than an outright sale doesn’t affect the CGT position, which is that on transfer of property between connected parties, the market value of that property must be taken into account rather than the amount of consideration actually changing hands. Therefore each property must be considered independently. If the property was a second home, CGT will usually be payable but if the property was always used as a main residence, principal private residence (PPR) exemption should be available and no capital gains tax will be due. It depends on the individual circumstances. If CGT is payable, it will be based on the increase in value minus the annual CGT exemption which is currently £12,000. It will also be possible to deduct the costs of the swap – legal fees, stamp duty and other capital expenditure – from any tax liability. CGT will be payable at a rate of 18% for basic rate taxpayers and 28% for higher or additional rate taxpayers.

Inheritance tax (IHT) – the difference in any value between the properties is effectively a gift unless payment is made based on that difference. Where however there is a difference, this will be a potentially exempt transfer (PET). Unless the person gifting the property dies within 7 years of the swap, no IHT will be due and even if this does occur, the person’s nil-rate band allowance of up to £325,000 will be taken into account. In addition, after three years, the IHT due will reduce with tapering relief. Importantly, once the swap has been made there should be no further benefit retained in the property which has been gifted, or it will be classified as a ‘gift with reservation of benefits’ and this will change the tax position.

Stamp Duty Land Tax (SDLT) – this is more complicated depending on the circumstances. Normally, there is no stamp duty payable on a gift, but there may be a liability if the properties are not equal in value, or if there is a mortgage which is being transferred.  There may also be a surcharge incurred of 3% if one party has another property already.

In summary, it is possible to do a house swap, and this may work very well for some people. However the likely tax liabilities must be borne in mind and before going ahead, we recommend taking professional advice and also investing in a property valuation from a RICs certified chartered surveyor. Then, if in the future HMRC does question the transaction, you will have a reliable valuation of the property for tax purposes.

For personal tax planning and inheritance tax advice, contact partners@rjp.co.uk. In addition, RJP LLP is authorised by ICAEW to provide a full probate service.

Get in touch for more details.