Minimising future CGT on a residential property - unmarried couple

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    Minimising future CGT on a residential property - unmarried couple

    This query relates to minimising future CGT that might arise on a residential property that I own in my sole name. Initially I lived in the property (so can claim some PRR) it's been let out for a large majority of the years that I've owned it. Details are as follows (assuming I was to sell the property now) :-

    1 Current Value £120,000
    2 Purchase Price - £55,000
    3 Gain £65,000
    4 Private Residence Relief - £4,670
    5 Letting Relief - £4,670
    6 Chargeable Gain £55,660
    7 Additional information
    • Leasehold property
    • No mortgage
    • Not working (nil rate taxpayer)

    I am contemplating transferring a 12.5% share of the property to my cohabiting partner (we are not married) in each of the next 4 tax years so that we eventually have a 50:50 split.
    My questions are as follows:

    1. Pro Rata - if I go ahead with this I am assuming that all of the above figures are pro-rata, so the chargeable gain in this tax year would be £6,957.50 (£55,660 x 12.5%) and therefore within my annual CGT allowance. Is this correct?

    2. Chargeable Assets - as the value of the share being transferred would only be £15,000 each year (£120,000 x 12.5%), assuming no uplift in value, am I correct in believing that I wouldn't even have to report this on my self assessment (i.e. the disposal/ transfer is below £44,400)?

    3. Stamp Duty - I'm aware of the new 3% additional stamp duty on BTL properties. But as the value being acquired by my partner is under £40,000 would she be exempt from this? (also see my question re Consideration)

    4. Consideration - a) what are the pro's and con's of transferring this as a gift as opposed to my partner paying me £15,000 in consideration for the transfer? b) would evidence of the consideration paid be needed, if so would a cheque or bank transfer of £15,000 from her to me be sufficient evidence? c) as an alternative she would be willing to transfer a part share of the home that we both live in to me as consideration. It's currently 100% owned by her and there would be no CGT implication (full relief) and is mortgage free. I figure that this is over complicating the situation (and adding another potential layer of cost) so would prefer not to do this at this stage, unless there is an advantage to doing this?

    5. Land Registry - a) which Land Registry form/forms need completing? b) are there guidance notes? c) is there a fee for this and how much is it?

    6. Record Keeping / Evidence - a) would I need to get a valuation as evidence each time I transfer a share of the property to my partner, or if the value of the consideration is in line with the current market value would this be sufficient? b) if I do need to get a valuation, would a sales valuation from a local estate agent be sufficient?

    7. Other Costs / Considerations - are there any other costs or considerations that I haven't covered?

    Any clarification on these points would be greatly appreciated

    #2
    1 - Yes

    2 - Below a threshold you don't HAVE to put on return but you can do, and there are advantages in doing so. You want HMRC 5 years from now to know that this is a not a retrospectively invented salami slice. She will also be paying income tax on the thing so what have you to hide? Question 10 on the TR1 form will also say the slice size each time.

    3 - AFAIK the 3% issue also applies to the gift SDLT issue -- if it is an outright gift and no mortgage then SDLT does not apply. Not sure if they allow slicing to avoid stamp duty in the same way as allowed for CGT.After all if you buy a house on the open market you cannot avoid stamp duty by paying in two parts over two tax years.

    4 - If a gift AND no mortgage then definitely no stamp duty. Can't have gifts going in both directions.

    5&6 - Easy DIY but I would really pay a solicitor £200 to do it for each slice -- you want an audit trail. You also want to get a formal valuation, though perhaps not in each and every year because it is not an open market sale. No not an estate agent - pay a surveyor/valuer.

    Your other option is to get married and do the whole exercise in one shot, though that won't crystallise your gains.

    Also bear in mind that she is not going to get the PRR and lettings relief when you sell on, though will be starting from a new baseline (which you must establish through valuation(s). At this kind of value I would be inclined to get formal valuations at the start and end of your process, and do some guesswork for the middle points.

    Why only 12.5% slices - you will save legal, valuation and other costs if you make the slices nearly twice the size and still be within CGT zero.

    Comment


      #3
      Thanks so much AndrewDod for your comprehensive response.

      a) There is a slight complication, hence being conservative with the 12.5% slice. When I purchase the property in 1989 it was joint with my previous partner (joint tenancy). We lived in it until late 1991 and it has been rented out since then. The land registry documentation shows the property was transferred to my sole name in 1997 which is when I bought her out (we never married). I have 2 valuations from 1997 which show the value as £55k, the same figure as the 1989 purchase price. As I haven't lived in it since then I don't know if I will only get 50% of the PRR and Letting Relief that I've calculated (my current calculations assume that I owned 100% from 1989). Do you know how HMRC will do the calculation in such a situation?

      b) Regarding the solicitor - what precisely would I be asking them to do?

      c) Assuming we do not get married and the annual CGT allowance remains in future tax years - is there any reason why I couldn't continue to transfer annual slices to my partner to the point where my remaining holding is covered by my CGT annual exemption?

      d) ... and is there any reason why my partner couldn't then start transferring annual slices back to me within her own CGT annual exemption (and benefitting from a newer baseline)?

      Many thanks for your thoughts!

      Comment


        #4
        a) I would have thought you have to deal with each half separately in calculating. No PRR on the 50% that was not owned by you when you lived there. I think.

        b) Do exactly what you could do your self - a brief cycle of correspondence, submitting the TR1 and writing back. Taking instructions from the parties.

        c) Can do

        d) mmmm. You think property prices are going to rise enough to make this a viable strategy to create enough capital gain each year?

        Comment


          #5
          d) Possibly not. Unless we continue hold the property long into the future. Might this strategy be seen as flouting the rules and not accepted by HMRC?

          Once again, many thanks

          Comment


            #6
            (Obviously,,,) whatever you do will be assessed under CGT rules when you sell, not CGT rules now.

            I am unaware of where the various future changes are neatly documented for us today....
            I am legally unqualified: If you need to rely on advice check it with a suitable authority - eg a solicitor specialising in landlord/tenant law...

            Comment


              #7
              Originally posted by theartfullodger View Post
              (Obviously,,,) whatever you do will be assessed under CGT rules when you sell, not CGT rules now.
              I am unaware of where the various future changes are neatly documented for us today....
              Yes exactly. A robust economy is based on a consistent set of rules, the predictability of which individuals can use to make rational decisions. But government doesn't want that, because they operate on a 4/5 year cycle.

              Like - for example - students were told that student loans would be repayable at a particular threshold using a particular rule. Folk decided to take loans and make big decisions based on that rule. Then the rule was broken.

              Like - for example - we were told that interest rate decisions would be devolved from government and made (basically) on a rule. Then the rules were thrown out of the window to protect those with existing asset (but not savings) wealth and those with large loans at the expense of our youth.

              This is why the economy is not robust. And it is why you cannot make decisions of the type you are making. For all you know the window tax will be reintroduced.

              Comment


                #8
                Many thanks

                1. So if I gift her a 12.5% share in each of the next 4 years there will be no SDLT to pay. I would be assessed for CGT based on 12.5% of the Market Value of £120k = £15k per year less exemptions and reliefs. Is that correct?

                2. For CGT purposes will she be deemed to have acquired each share at a) nil cost? or b) 12.5% of MV?

                Comment


                  #9
                  Slicing for CGT is OK. Slicing for SDLT is a more dubious area.

                  If you break the purchase into many small transactions (different purchasers, different tax years), you could think you could avoid Stamp Duty for any house purchase. But HMRC may well clobber you with rules on "linked transactions" (transactions seen by HMRC as linked they are added together and SDLT is worked out on the total). Transactions are linked if between the same seller and buyer – or even people connected with them in a series of transactions. That is not to say SDLT and the 3% will be payable in your particular circumstances (see above), but just to make the general point that splitting transactions to avoid SDLT cannot be assumed to be a safe thing to do in general (unlike, as I said, CGT).

                  Comment


                    #10
                    You are contemplating gifting half of your property (and its future gain) to someone in order to "save" tax which is (definitely now and probably going forward) less than 50% on the gain only.

                    If you're both happily together in 10 years time it will be academic; if you're not it would be less of a good outcome.
                    I'm not trying to suggest you should assume you'll split up - one of you could die or become addicted to something.
                    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


                      #11
                      We've just past our 20th anniversary together - more than most married couples I would suggest!

                      Regarding my 2nd point. For CGT purposes will she be deemed to have acquired each share at a) nil cost? or b) 12.5% of MV?

                      Comment


                        #12
                        marieandjeff,

                        Gifting for CGT purposes is at Market value.

                        Comment


                          #13
                          You need to sit down with an accountant.

                          These are linked transactions, and there's a limit on how much you can "gift" without complication.

                          You should get married, do the transaction and separate amicably.
                          You'd save a fortune (and have the basis of a sitcom).
                          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

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