QUESTION: I own a residential property which I would like to gift to my daughter as she has moved out of the family home and she is finding it difficult to finance the purchase of a home herself. The house I hope to gift to her is not the family home, it is a property I have owned for several years having inherited it from a deceased aunt. I don’t want to use trusts, I simply want to give the property to her during my lifetime. Will I be required to pay capital gains tax if this is a gift?
ANSWER: A gift is treated as a disposal for capital gains tax (CGT) purposes. If you decide to gift a property to your daughter, the capital gain you’ll be taxed on is based on the current market value of the property. HMRC will tax you as if your daughter has paid you the current market value of the property, therefore any increase in the value of the property from the market value at the date your aunt died will be taxed on you under normal CGT rules. CGT is then charged at either 18 per cent or 28 per cent depending on whether you are a basic or higher rate taxpayer and it could well be a combination of both rates if your gain pushes you into a higher tax bracket.
There are, however, some exemptions and reliefs that you can use to reduce the CGT you may have to pay. Each individual has an annual exemption and for tax year 2019/2020 the annual allowance is £12,000 so any gain on the property up to this amount will be tax free. If you make the gift before April 6 2020, you are required to self-assess your tax and declare this on your 2019/20 tax return. This must be filed before January 31 2021 and any tax liability must be paid before this date also.
However, if you gift the property after April 6 this year, you will taxed under the new CGT rules. Home owners are being warned that they have just over two months to prepare for the introduction of a 30-day payment window for CGT on property sales. From this date taxpayers must complete a new standalone online return and submit it to HMRC, together with the tax due within 30 days of the transaction.
To make the submission you must create a government gateway account and ensure that your records are up to date well in advance of the sale, to ensure that this tight deadline is met and that penalties and interest are not incurred. This will be a very difficult process as the CGT rate you must levy on your gain depends on the level of your income earned for the entire tax year. This will require estimates to be used and will be very difficult for taxpayers who have unpredictable or fluctuating earnings, or for taxpayers who make several CGT disposals during a year.
These dramatic changes to the administration and payment of CGT for those selling second homes or investment properties is also likely to create cash flow difficulties. Individuals gifting properties who may not have the required levels of cash within 30 days of the gift, may need to write to HMRC within the 30-day window and make an election to pay the tax in ten equal instalments, the first being due on the day the tax would have been payable. The time frame for giving notice to HMRC before the tax becomes due will undoubtedly also create practical problems.
There should be no stamp duty land tax (SDLT) payable on the transfer of the property to your daughter if it is gifted. However, if the property is mortgaged and your daughter assumes this liability then SDLT will be due based on the normal SDLT thresholds and rates. Before making a final decision on whether to make a gift to your daughter of a second home which you inherited, the Inheritance implications should also be considered. Professional advice is recommended as a simple gift is not always simple.
:: Janette Burns ( j.burns@pkffpm.com) is associate tax director at PKF-FPM Accountants (www.pkffpm.com). Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
