Transfers of certain types of property, to anyone other than a spouse, will generally mean you have to pay capital gains tax as if you had sold the property at its market value.
Adding to that pain, any taxable capital gain arising for disposals taking place after 5th April 2020 must be reported within 30 days with an estimate of the capital gains tax due, paid by the same date.
Hence, a reduction in market value during the current crisis may give an opportunity to make a transfer with a more acceptable capital gain tax cost than previously.
Let's look at an example scenario:
A higher rate taxpayer with a portfolio of residential properties may consider passing some properties on to their adult children in order to reduce inheritance tax arising upon death.
Let’s say this taxpayer has two properties bought several years ago for £200,000 which have shown modest increases in value to around £250,000 each. If these properties had been transferred to adult children last year, the capital gains tax (CGT) arising on both transfers would have been £24,640 (£100,000, less £12,000 exemption, x 28%).
However, as an example, let’s say that by May 2020 the properties have reduced in value due to the coronavirus pandemic by 15% to, say, £212,500 each. By taking the opportunity of transferring both properties whilst their values are depressed, each property realises a gain of just £12,500. This gives total gains for the tax year of £25,000.
After deducting the annual capital gains tax exemption of £12,300, the taxable gain is just £12,700. This gives rise to a CGT bill at 28%, of a mere £3,556. It’s worth noting that this is all assuming that the person transferring the properties is a higher or additional rate taxpayer.
In this example, not only has the property owner saved £21,084 in tax, but they were able to transfer both properties straight away at lower cost instead of over two years or more.
Additionally, if the property owner’s taxable income for the year is reduced below the higher rate threshold (currently £50,000) due to the current crisis, there may be a further tax saving on property transfers as the CGT rate would fall from 28% to 18%, saving a further £1,270 in tax.
However, the inheritance implications of the transfer or gift should also be considered. Lifetime gifts are potentially exempt transfers for inheritance tax (IHT) purposes. What this means is that the transfer becomes fully exempt from inheritance tax after seven years. However, if the former property owner dies within seven years of making the gift, the value of that gift is effectively clawed back into the estate for IHT purposes. But, the key point is that the value of the gift is assessed at the time that the gift is made, which presently, is potentially at its lowest value for years!
In our example above, if the property owner was to die within seven years, the value which will be clawed back from each property will be £212,500 instead of £250,000. This creates a reduction of £75,000 in value, saving the family up to £30,000 in IHT (75,000 × 40%)!
These potential IHT savings also continue to apply to the vast majority of furnished holiday lets since, although these can usually be transferred free of capital gains tax (as the gain is deferred), they will usually still be subject to inheritance tax.
The important thing to remember is that property values are likely to have dropped and there is an opportunity to make transfers to adult children and others at reduced rates of taxation.
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