Properties commonly comprise the majority of an individual’s estate, in value terms, and so reviewing the ownership and implementing changes around property are key aspects of estate planning.
In 2021/22, 2.1 million households reported having at least one second property, and so clients often consider whether to gift their property to reduce the value of their estate and, in doing so, mitigate their potential inheritance tax (IHT) exposure.
This article focuses on the CGT and IHT implications when considering gifting property, particularly in light of the Spring Budget announcement that the top rate of Capital Gains tax (CGT) for higher and additional rate taxpayers is being reduced from 28% to 24%.
Capital Gains Tax
A sale or gift of a property is treated as a disposal for CGT purposes. If any asset is disposed of and there has been an increase in value since the date the asset was acquired, there will likely be a charge to CGT. The amount of CGT is calculated by looking at the difference between the value at the date of acquisition and the value at the date of disposal after allowable deductions such as estate agents and solicitor fees.
There is, however, a potential CGT relief available for individuals on the disposal of their main residence. Principal Private Residence (PPR) exempts, without limit, the full gain on the sale or gift of one’s main residence. The relief is available in full when the property has been an individual’s only or main residence for the entire period of ownership (or all but the final 9 months of ownership).
PPR is also partially available when the residence has, at some point during the ownership, been the main residence, such as if the property has been let out for one or more periods.
In recent news, controversy surrounding the applicability of PPR has come under the spotlight in relation to Labour’s deputy leader, Angela Rayner. Mrs Rayner is reported to have failed to pay CGT on her disposal of her property as she stated it was her main residence. However, for married couples, as in the case of Mrs Rayner, they can only have one principal residence for CGT purposes and if they do own more than one property, they have to choose which is their main residence.
It is, therefore, unclear whether this property was her main residence and if her disposal was, in fact, eligible for PPR.
Individuals should, therefore, carefully consider the potential CGT implications of any disposal.
Capital Gains Tax rates
From 6 April 2024, the annual exempt amount for CGT purposes is reduced to £3,000 for an individual in each tax year, and the rest of the gain (to the extent there is a gain) is chargeable as follows on residential property:
Gains on disposals of residential property and carried interest. | |
Rate for basic rate taxpayers | 18% |
Rate for higher and additional rate taxpayers | 24% |
Inheritance Tax
A second consideration is the IHT implications of a lifetime gift of property.
As a starting point, IHT is charged at 40% and applies to UK and non-UK residents alike on their ownership of UK situated assets. All individuals, including non-UK residents are entitled to an allowance of £325,000 (known as the nil-rate band) under which IHT is not payable. As such, the rate of tax is 40% insofar as the value of the deceased’s UK assets exceeds the nil-rate band.
The value of a gifted property above the available nil-rate band would likely be considered a potentially exempt transfer (a PET). This means that IHT is not payable on that gift provided the individual who makes the gift survives seven years.
If the individual making the gift were to die within seven years of making the gift of the property, the gift will be pulled back into the estate, and IHT will be payable to the extent it exceeds the nil-rate band. The IHT will either be payable by the persons who received the gift or from your estate at the rate of 40%.
A further consideration is, if a property is gifted and the individual making the gift continues to benefit from the property for example by receiving the rental profits, the gift would be treated as remaining in your estate. This is known as a ‘gift with reservation of benefit’.
Conclusion
In summary, if you are considering making a gift of a property, legal advice should be taken of the potential tax implications of making the gift.
For private wealth & tax advice and services, please contact Eleanor Catling via our contact form below.
