Transfer of equity and CGT

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    Transfer of equity and CGT

    My wife and I bought a BTL flat about 12 years ago as tenants in common.

    The flat is now mortgage free and we have stopped renting it out and now our son lives there, paying a below market rent which covers the ground rent, insurance, etc.

    When it was rented to tenants, we lodged a form 17 and a deed of trust with hmrc to split the ownership 90/10 in favour of my wife in order to reduce my income tax liability, which is still valid.

    Eventually we want our son to own the flat as his home, either now or when we are both deceased. We are currently both healthy and in our mid sixties.

    We know CGT will be due if we transfer it wholly to him.

    We were considering the transfer of my 90% equity to our son, leaving my wife on the deeds, with the intention that my wife leaves her 10% equity to our son in her will.

    I would appreciate any advice or views on this proposed course of action, especially with respect to CGT. Will we have to pay CGT on transfer of equity, or will our son end up being liable at some time in the future, eg if he decides to sell at a future date.

    We are planning to update our wills this month and seek professional advice, however you clever people might offer alternative tax efficient options.

    #2
    I don't really see any advantage of transferring ownership to your son from a purely tax perspective (although I can see lots of other reasons it might be a nice idea).

    I don't know of any simple way to avoid creating a CGT event when the title or beneficial ownership changes in this way. You used to be able to achieve it with a beneficial trust, but I think that option is no longer available when it's within the close family.

    If your son stops paying rent and, instead, acts as the owner, paying for maintenance and looking after the flat, he would probably acquire some beneficial interest automatically.
    When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
    Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

    Comment


      #3
      Thank you Jpkeates for your information, all views gratefully received.

      Comment


        #4
        Sorry, didn't really answer the question.

        When the ownership changes it would be a CGT event and tax would be owed by you and your wife (in the percentages set by the deed of trust).

        There may be a way to avoid that, but the most it could achieve is to defer it until the next event, which is likely to be the property sale - but it would be complicated if either or both of you were to die before the sale.
        It's not something I've ever been involved in, and the proposals to achieve this I can find online are either out of date or look quite complex.

        What are you trying to achieve by transferring the ownership - is it a question of paying CGT so your son doesn't have to, to reassure your son about his future home or something else?

        If you have your own home what do you expect to happen to that if you and your wife (hopefully far into the future) shuffle off mortal coilwise?
        When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
        Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

        Comment


          #5
          You bought the flat some 12 years ago and registered as "tenants in common" ( yourself 90% and wife 10% ? )

          Then you changed the beneficial ownership to wife (90%) and yourself ( 10%) by DOT and informed hmrc by form 17.

          If you want to transfer 90% , you will have to terminate the DOT and inform hmrc.

          Then you return to previous situation yourself ( 90% ) and wife (10%).

          Now you want to transfer your 90% interest ( no mortgage ) by "gift" to son . There is no sdlt to pay but after disposal , you will have to pay tax on the "capital gain" achieved during 12 years ownership. So before you act, you need to get a written valuation for the property and a note to value 90% interest from a chartered surveyor.

          When your son sells the property, he will be exempt for paying tax on the capital gain during his period of self -occupation.

          Also you as the giftor have to live 7 years after making the gift or else part of the gift value may be added back for calculating IHT.

          The threshold for IHT is £650,000 ( for H&W) and then any value above is charged at 40%. tax.

          The threshold for CGT is £11,700 ( free of tax ) and the capital gain above £11,700 is charged at 18% or 28% tax rate.

          One more point to watch is the unexpired term of leasehold flat. Extending the lease after the unexpired term has fallen below 80 years is more expensive due to marriage value included in the compensation formula.



          Comment


            #6
            Also, you should stop taking any rent, as hat would mean there would be a gift with reservation and the PET clock wouldn't start.

            Comment


              #7
              Thank you jpkeates, gordon999 and leasholder64 for your replies which are very informative. Our intention was to transfer the flat to our son before we die in the most tax efficient manner, so we could reduce the size of our estate and be happy that he had his own home before we both die.

              We increased the lease to 999 years recently.

              From your responses, and after much thought, I think the most cost effective way is to let our son live there continuously and leave it to him in our wills.

              My thoughts were, as we are tenants in common, for the first husband/wife to die would leave their proportion of the ownership to our son, then the remainder to him on the death of the second husband/wife.

              I don't know if this might mitigate some of our IHT by having reduced the size of the total estate by the time the surviving spouse expires. I guess reverting to 50/50 ownership would be a good idea in this case.

              As an aside, our home is owned as tenants in common also.

              As always, grateful for any views.

              dave

              Comment


                #8
                It depends on the value of the property, the rest of your estate and your son's circumstances and intentions (which is why you need advice from someone who knows your specific circumstances).

                If your properties are owned as tenants in common, there's probably a reason for that, so it's possible someone has already put in place the ground work for this, based on the value of the properties.

                You also need to consider what happens if you don't die in the planned for sequence; who would inherit the son's half if he pre-deceased a surviving parent?

                You've obviously spent some time accruing the assets you're planning for. Do you want to lock them into the family with some kind of trust, so that a costly divorce for your son or some unforseen debt claim against them means the estate (or some of it) could be prevented from passing out of the family?
                When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

                Comment


                  #9
                  Thank you jpkeates for your thought provoking posts which have been very useful. We have an apointment with our solicitor next week, so feel a bit better informed and clarified some of our options.

                  many thanks

                  dave

                  Comment

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