Gifted deposits for property purchases and UK tax implications

Question:

My question relates to how gifted deposits are taxed in the UK.

I'm a property investor who principally buys properties for the purposes of lettings. I've become aware of opportunities to buy property without a deposit, commonly referred to as `gifted deposits.`

My scenario is however quite unusual. I am about to exchange contracts on a property which is worth £100,000 but I'm only paying £70,000. The application to the lender, contract itself etc have all been at £70,000, with an 85% BTL mortgage granted.

Should the contract show the price being £100,000 with £30,000 as a gifted deposit and would this lower my CGT when I sell it?

The sellers aren't bothered what price is shown on the contract as the property is their main residence.

If I do go for a gifted deposit option how should this be structured.

Answer:

This is an unusual scenario and detailed advice should be taken. However, you should have a good claim that the acquisition cost of the property for Capital Gains Tax purposes would be the £100,000 as opposed to £70,000.

Under normal circumstances, the disposal proceeds for the vendor along with the corresponding acquisition cost to the purchaser would be the actual proceeds received for the property (ie £70,000).

However, there are broadly two circumstances when the market value of the property would replace the actual disposal. The first is where the transaction is between connected parties. This would apply to transfers between family members and business partners, and would not be relevant in your situation. Secondly, the market value is used when the disposal is not a bargain made at arms length.

A bargain made at arm's length is a normal commercial transaction between two or more persons. All of the parties involved will be trying to obtain the best deal for themselves in their particular circumstances.

A transaction is `otherwise than by way of a bargain made at arm's length' when one of the persons involved in the transaction does not intend to get the best deal for themselves from transaction and that person enters into the transaction with the subjective intention of giving some gratuitous benefit to the other person. The typical example of this is a gift of an asset.

Therefore in relation to your scenario it would need to be considered whether the market value rule could apply.

As it is currently structured it could be argued that there was no bargain at arms length, however I would expect that this could be denied by the HMRC dependent on the circumstances. They may for example be letting you have the property for less for a quick sale (eg if they couldn't sell) and this would therefore still be an arms length transaction.

If however, they were to accept £70,000 for the property and gift the remaining £30,000, this should ensure that there disposal value is £100,000 (ie market value) and your acquisition cost is also £100,000. Note that the £100,000 cost would apply for CGT purposes and this structure would only work as you are acquiring the property at less than market value.

Therefore a deed of gift would need to be drafted identifying the gift. You would need to discuss the impact on the conveyancing/mortgage with the solicitor/mortgage company.

Essentially the deed of gift would ensure that the cost/proceeds are uplifted for CGT purposes.

From the vendors perspective providing the property is their main residence, and has been throughout their period of ownership, they should be entitled to full principal private residence ('PPR') to eliminating any gain on disposal.

If the property was not their main residence, their gain would be calculated on the market value of the property and as such would increase their CGT charge.

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.

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