A common thing to happen among landlords is that as they age they decide to start passing properties down the generations.
Often this crops up in the “any other news” part of a chat as something that happened a while back. I ask if the gain on the gift was declared and people look at me as if I am mad.
How can there be tax on the gift of a property!? No cash changed hands!
Well, unsurprisingly, HMRC have many ways to extract a tax charge and gifts of shareable assets like property is a one that is long standing and very misunderstood.
First I should mention there are so many factors to consider when gifting property including but not restricted to inheritance tax, stamp duty land tax, local authority care fees and the need to ensure you have the income you need in retirement.
Let’s look at capital gains tax for now though. When you take part in a transaction that is “not at arm’s length” you are deemed to have sold the asset for full market value. This basically means if there is a non-commercial transaction HMRC can impose a sale figure in to the transaction.
Put simply if you give away a £100,000 house to a family member, friend or someone else you will be deemed to have sold it for that value. This means a tax charge can arise even though no cash has changed hands (know as a “dry” charge).
Who pays the tax? Well the person making the gift!
There are ways to do this via trust that push the tax down the line but you could also consider simply charging a nominal amount for the property – enough to cover the tax for instance – to avoid what is called a “dry” charge.
This is enough to make gifting property complicated before we bring in all the other matters!