I want to gift my main home, which is worth over £2mn and doesn't have a mortgage, to my daughter. And I would like to buy another property as my main home at the same time.
Will I or my daughter have to pay capital gains tax (CGT) on the transfer if and when my daughter sells this property? Also, am I right in thinking that this gift will be liable to inheritance tax (IHT) if I die within seven years of the date of making it?
I am aware that I will have no future interest in the property that has been gifted. But what is the position if I move back into the property, and what if I pay market rent for the part which I occupy? And what would be the position if I become infirm and needed support from my daughter, so moved back in?
Or are there any other ways to gift the property and any other tax issues to take into account? IL
Stefanie Tremain, partner at Blick Rothenberg, says:
When making lifetime gifts of assets it is important to consider both the CGT and IHT implications.
For CGT purposes, a gift between two connected individuals is deemed to take place at market value. Generally, the people you are connected to for CGT purposes are your spouse or civil partner, your own and your spouse/civil partner's siblings, lineal ancestors and lineal descendants.
When you gift the property to your daughter, you will be deemed to be disposing of it at the current market value. Your base cost will be the acquisition cost plus the costs of any capital improvements you have made, for example an extension, provided the improvement is still reflected in the market value of the property when it is gifted. This will give you your capital gain for CGT purposes.
If a property has been occupied as a main residence, the capital gain on disposal is potentially exempt from CGT under main residence relief. If the property has been occupied as a main residence throughout the ownership period this relief is available in full. But if there have been any periods of absence the relief may be restricted.
Relief is also available for land that comes with a property, provided it is occupied, and used as the garden and grounds of the house at the point of disposal but not used for another purpose, for example, a trade or business or commercial woodland, and is not fenced off for development. If the gardens and grounds enjoyed as part of a property are within 0.5 hectares – around1.2 acres – relief is automatically available. If the gardens and grounds exceed 0.5 hectares, relief may still be available provided certain conditions are met and there is agreement from HM Revenue & Customs (HMRC).
So if the property has been occupied as your main residence throughout your ownership period and the total grounds are less than 0.5 hectares any gain should be fully exempt from CGT.
If main residence relief is not available in full, perhaps because you did not live in the property for a period, or the size of the land exceeds 0.5 hectares and HMRC does not agree that that the excess qualifies for relief, a proportion of the capital gain may be chargeable. CGT would be payable at 18 per cent or 28 per cent depending on the level of your taxable income, to the extent that the gain exceeds the annual exemption which is currently £12,300. If there are any capital losses realised in the same tax year or brought forward from a previous tax year they will also reduce the taxable gain.
If CGT is due, you need to file a CGT return and pay any tax due within 60 days of transfer, and report the gain on a Self Assessment tax return for the year of sale. If no CGT is due it is not necessary to file a CGT return.
Your daughter will acquire the property at the current market value and this will be her base cost for CGT purposes. If she lives in the property as her main residence any capital gain when she sells or otherwise disposes of the property should be potentially exempt from CGT. If she doesn't live in the property, for example, because she lets it, main residence relief would not be available and any gain would be fully chargeable to CGT.
The gift would be a potentially exempt transfer and fully exempt from IHT if you survive for seven years after making it. If you survive for seven years and the gift is effective, the potential IHT liability on your death would be reduced by £800,000 – £2mn at 40 per cent. If you passed away after three years the effective tax rate would be reduced by 8 per cent a year.
If you continue to benefit from the property after making the gift, the value of the benefit you reserve will remain in your estate for IHT purposes until such time as you no longer benefit. Simply, the gift fails for IHT. If you lived in the property in the future you would need to pay your daughter a market rent on which she would have to pay income tax, to ensure that you are not considered to have reserved a benefit.
You would not be considered to be reserving a benefit if you moved back into the property due to unforeseen circumstances in which you became infirm and your occupation represented reasonable provision by your daughter for your care. If there were any intention or agreement that you would move back in with your daughter at some point in your old age, however, this concession would not apply as it would not be unforeseen circumstances.
But there are some de miminis exemptions. For example, you could: stay overnight in the property; stay in the house with your daughter for less than one month a year or without your daughter being present for no more than two weeks a year; or stay temporarily while recovering from medical treatment.
