You can legally transfer your property at any time, even while you are still living in it, but there are complex rules to be aware of as Alister Biggar outlines below.
In this article we look at some of the issues which arise from property transfers and concentrate on the main property taxes which come in to play, namely Capital Gains Tax (CGT) and Land and Building Transaction Tax (LBTT) and as well as that VAT can also be an issue with property transactions.
This is of course a very complex area and typically these scenarios can involve several taxes and consequences for all concerned but we hope that this article provides a useful overview on the law and the tax implications involved.
People often assume that giving an asset to another person will be tax free but unfortunately CGT is normally due even where there is a gift. The donor is taxed as if he or she had sold the asset for full market value, essentially, HMRC wants its share of the tax that would be due on a commercial sale, even if you don’t want or receive any proceeds.
HMRC is most likely to pick up on this in cases where property is transferred to a relative, or to a trust but, in fact, it potentially applies in almost all cases.
A ‘bad bargain’ is not a gift
HMRC should not try to insert a higher value just because they think you could have made a higher gain. Essentially, if you agree to sell to an unconnected party at a discount (e.g. because you are in a rush to sell), then that is usually fine so far as HMRC is concerned. Likewise, if you didn’t know you could have sold for a higher price, but made a ‘bad bargain’, but this does not apply for gifts between connected parties, such as relatives, trustees or in some cases business partners.
If HMRC can say that you deliberately intended to confer some element of gift or bounty, then the transfer is otherwise viewed as a bargain made at an arm’s length and market value should normally be used instead.
Transfers between spouses and civil partners
You might be familiar with the rule that says that there is not usually a CGT charge when property is transferred between spouses and strictly speaking there is still a disposal for CGT purposes but:
• It ignores any proceeds actually received, so it bypasses the general ‘market value’ rule as outlined above and
• The transfer is for CGT purposes deemed to take place for such consideration as gives rise to neither a gain, nor a loss.
While it is generally acceptable to say that the transferee spouse simply ‘inherits’ the transferor spouse’s base cost, the transferee spouse does not always inherit the transferor spouse’s ownership history.
This is particularly important from the perspective of entrepreneurs’ relief and the ‘associated’ disposal of property used in a qualifying trade, where assets need to have been held for at least a year in order to be eligible. Unlike its predecessor, the business asset taper relief, the transferee spouse cannot qualify by reference to the transferor spouse’s holding period (although, where the transferee spouse does qualify in his or her own right, more ownership in an asset can be transferred without having to wait a further year for the extra portion to qualify and this can be very useful).
The main residence
Where one spouse transfers an interest in his or her main residence to the spouse, the transferee spouse ‘inherits’ the transferor spouse’s ownership history for their interest. The same applies to inheritance on death. Basically, these rules are meant to ensure that it doesn’t matter who owns what interest in the family home. But it also means that, if the transferor spouse’s ownership history is not ‘perfect’, perhaps having spent too long away from the property for it all to qualify, then the transferee spouse’s ownership will likewise be compromised. However, these rules apply only if the property is the main residence at the point of transfer. Very briefly, this can present planning opportunities if managed correctly, so that periods which might otherwise be eligible for private residence relief may be saved.
The generous rules for transfers between spouses require that they be living together as a couple. The rules continue to apply in the tax year in which ‘permanent’ separation occurs. After the end of that tax year, the spouses are in the uncomfortable position of still being ‘connected’ for CGT purposes (prior to decree absolute) but unable to enjoy the ‘no gain/no loss’ regime they might have relied on for years beforehand. This means that the ‘market value’ rule will normally apply, regardless of any proceeds actually received. Care is needed to navigate the quite complex CGT rules around separation and divorce. This should not be an issue if the only property is the family home, as any gain is likely to be covered by Principle Private Residence relief (PPR).
Land & Buildings Transaction Tax (LBTT)
LBTT is generally due on the consideration paid by the purchaser. A lifetime gift from one individual to another, of any property, is therefore exempt from LBTT. Broadly, this applies to all gifts, not just those between spouses. However, one of the key traps for LBTT purposes is that agreeing to take on part of the mortgage on a property ‘counts’ as consideration. If an individual purchases a second residential property, for a valuie over £40,000, there is an additional 3% LBTT to pay.
The rules for partnership property can become very complex. Basically, each partner is deemed to own a part share in the partnership’s assets. Depending on the circumstances and any partnership agreement, a change in the partnership sharing ratio (e.g. on introducing a new partner or on a partner’s retirement), can result in a disposal for CGT purposes. One of the quirks of partnership property is that CGT and LBTT may follow different ratios, depending on the partnership agreement.
VAT on property is notoriously complex (although residential properties are usually exempt from VAT, commercial property sales are commonly caught). LBTT is chargeable on the VAT inclusive price. Perhaps, surprisingly, one of the areas in which VAT tries to be helpful is in terms of property business transfers. If a property sale counts as a business transfer for VAT purposes, then it may actually be outside the scope of VAT and no VAT will be due. What some non-VAT practitioners miss is that the VAT regime for a ‘transfer of a going concern’ (TOGC) is mandatory, not optional.
There are, of course, numerous potential traps with VAT and property, such as the capital goods scheme and the flat rate scheme (which can catch out those letting residential property alongside the taxable business) to name just two.
If an individual transfers a property (other than to their spouse), the gift will be a transfer for Inheritance Tax Purposes. The transfer will be a ‘Potentially Exempt Transfer’. If the transferor died within 7 years of making the transfer, IHT may be payable by the recipient.
In a short article such as this, it is only possible to point out a few of the potential traps relating to the transfer of property but that said, there are one or two opportunities such as transferring residences between spouses at the right time and enhancing entrepreneurs’ relief between a couple.
We would definitely recommend that you seek professional advice well in advance of any proposed property transaction, please don’t hesitate to get in touch with me or one of the team at JRW for further advice.