Minimising CGT on property development - USERNAME: nick.q - 23/12/2014
Tax Question:
I am looking to gain planning permission to build 3 houses at the bottom of my garden. I do not wish to sell the houses but rent them out.
I also have 3 children and at some point I am considering transferring ownership of the 3 houses to them [one to each of them].
What are the capital gain tax implications of:
1. Selling the houses myself and gifting the proceeds to my children
2. Transferring ownership of these houses to my children before or after they are built?
3, My children selling the houses at some point in the future.
Answer:
Well if you develop and sell the houses the first issue will be whether you'd be taxed as a trader or investor. This is a question of fact.
If your intention was to develop and sell you'd be a trader. If you intended to develop and rent out you'd be an investor.
In terms of establishing your intention HMRC would look at the circumstances surrounding the development (eg the method of finance, source of funds, stated intentions etc).
If the properties were developed, let for a period and then transferred to the children at some point in the future you should be able to argue for investor status.
On the transfer to your children this would then be a market value disposal and the gain on each property would be subject to CGT. (It would also be a potentially exempt transfer for IHT purposes but there should be no IHT implications providing you survive for at least 7 years from the date of the transfer).
Unless you had occupied each property as a main residence at some point there wouldn't be any PPR relief to reduce the capital gain to you.
On a disposal by the children their base cost would be the market value at the date of transfer to them.
In terms of CGT the preferred option may be to gift the land to your Children. Providing you are gifting part of your garden and if the property has less than 0.5 hectares any gain on the land to date should be covered by Principal Private Residence ('PPR') relief. Your Children would then hold the land at the market value at the date of transfer to them. They could then build the properties (you could loan or gift funds if you wanted) and occupy the properties as their main residences. On a future disposal by them any capital gain would be free of CGT.