UK CGT and IHT on transfer of property to Son

Question:

I am living as a US citizen in the US, but also have UK citizenship and own a property in the UK. The property has a number of buildings and is run as a rental property business, on which I pay UK tax, although if I sell it, as I have been a non resident for over five years, CGT would not be payable in the UK, but in the US.

The overall property is valued at between 1.2 and 1.4 million pounds, but I have been advised that if the various properties are sold separately it would likely raise more. My questions relate to IHT and CGT.

I am considering making a Potentially Exempt Transfer of one or two of the cottages to my son, who currently lives in one of the buildings at the overall property. He would like to purchase a different property elsewhere for he and his family to live, and so the sale of the two cottages would allow this to happen.

For ease of responding to the questions, let's say that the two cottages are valued at 500,000 (together), and the remainder of the property is valued at 1 million pounds. Questions: If I make this Potentially Exempt Transfer of one or two cottages to my son:

a) Is there stamp duty payable on the transfer?

b) If I sell the remainder of the property at any time during the 7 year life of the PET before it fully leaves my estate, will I only be paying CGT on the remainder, i.e. on the 1 million pounds (less the allowable deductions).

c) If I make a PET of one or both cottages, I am assuming that the deeds of these properties will then be in my son's name and that he can then sell them, any time after the transfer, in order to purchase this other property. Is that correct?

d) I had the thought that if a property was purchased for approx 300,00 pounds then that could be purchased by my son (assuming that c) above is correct) and would of course then rely on me surviving seven years to be fully his. However, if a property was purchased (rounding out figures) for 500,000 pounds, then I am thinking that we could form a limited liability company or partnership to purchase it, and my son would have 300,000 shares and I would have 200,000.

My thinking on doing this was to make it easier for me to make further gifts (PET's) of shares in the property, or for him to purchase them from me, over time, until it was fully in his ownership.

Does that sound like a useful and practical direction to be thinking in? (rather than the new property being in our joint names) or are there pitfalls and considerations that I am not currently aware of?

Answer:

a) Is there stamp duty payable on the transfer?

If you simply gifted the property(s) to him (ie for no consideration) there would be no stamp duty on the transfer. Note that if the property is subject to a mortgage and he assumes liability for this, this can be classed as consideration and is subject to stamp duty.

b) If I sell the remainder of the property at any time during the 7 year life of the PET before it fully leaves my estate, will I only be paying CGT on the remainder, i.e. on the 1 million pounds (less the allowable deductions).

Yes. The cottage gifted belongs to your Son for CGT purposes. The remainder of the property (eg the £1M/ + the remaining cottage) belongs to you. The fact that you need to survive for 7 years for the property to be excluded from your estate for IHT purposes would not impact on the CGT position.

If you sold the remainder you'd be within the scope of CGT on that disposal. If you're non resident though as you state you could be exempt from UK CGT in any case.

c) If I make a PET of one or both cottages, I am assuming that the deeds of these properties will then be in my son's name and that he can then sell them, any time after the transfer, in order to purchase this other property. Is that correct?

Yes, that's correct.

d) I had the thought that if a property was purchased for approx 300,00 pounds then that could be purchased by my son (assuming that c) above is correct) and would of course then rely on me surviving seven years to be fully his.

However, if a property was purchased (rounding out figures) for 500,000 pounds, then I am thinking that we could form a limited liability company or partnership to purchase it, and my son would have 300,000 shares and I would have 200,000.

My thinking on doing this was to make it easier for me to make further gifts (PET's) of shares in the property, or for him to purchase them from me, over time, until it was fully in his ownership.

Does that sound like a useful and practical direction to be thinking in? (rather than the new property being in our joint names) or are there pitfalls and considerations that I am not currently aware of?

You certainly don't want the property owned by a limited company. This could give rise to substantial tax charges on your Son in terms of receiving a benefit in kind from the company (ie accommodation provided by the company at nil/low rent) and would prevent the capital gain being exempt on a future disposal as principal private residence relief could not be claimed.

You could use a form of joint ownership or loan him the remaining £200K. Then as you wished to make a gift you could waive an element of the loan until the loan was completely eliminated. Each waiver would be a PET by you.

Given though that each PET would be subject to the 7 year requirement, and if this is an issue it could be beneficial to ensure that the cash was gifted at the time of the initial property acquisition.

About the Author

He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.

Google+

=============================================================

Disclaimer

i) Please note that the articles/answers contain general guidance only and do not constitute accountancy, tax, investment or other professional advice.

ii) The contents of this article/answer are for information only and are intended to assist readers in identify any tax planning opportunities that may be available to them. The information contained in this answer is not intended to be a substitute for taking proper taxation advice and should not be relied upon in this way. Always consult a qualified accountant or taxation adviser. Your situation will then be looked at individually and specific advice relevant to your circumstances can be given. The Expert does not accept responsibility for any loss arising as a result of reliance on any information contained in this answer.

These Notes (and Disclaimer) do not affect your statutory rights in the United Kingdom.