Will gifting my buy-to-let property lead to a big capital gains tax bill?

6 September 2019

Q

I have a buy-to-let (BTL) property with my daughter as tenant, using a mortgage for family members. I plan to pay off the mortgage and transfer ownership to my daughter. As I understand it, HMRC will view transferring ownership as selling it, so I will incur capital gains tax (CGT). The property is in south-east London and has increased significantly in value. As we’d have no income from a ‘sale’, the potential CGT is likely to be beyond our means or at best difficult to achieve.

We have two children and intend to pass on the house we live in to our son, so no IHT will be due. I believe the BTL property will be classed as an asset with IHT due at the normal rate at the time.

This is not an attractive option as my daughter would have to sell to pay the CGT.  Both properties are similar in value at about £350,000 each. I am married. Is there a better way to pass on the BTL property or will I have to find the money for the CGT?

From
PB/Bedford

A

Assuming your daughter is no longer classed as a dependant, you are correct that the sale or transfer of the BTL property to her will count as a disposal for CGT purposes. CGT is payable in the January following the tax year in which an asset is sold. For example, if the sale was agreed in August 2019, then the tax is not due until January 2021.

You could transfer the property into a trust for the benefit of your daughter and then elect to defer the CGT until a later point – that is, when the property is sold. At that point, your daughter may qualify for main residence relief, which would help to reduce the eventual CGT tax liability payable. Please note, though, that property trusts are complex and can be expensive to set up. You should seek both legal and tax advice before proceeding in this way.

Another option for you to consider is to sell your daughter only a percentage of the property rather than all of it. This may help to reduce the CGT liability to the point that you may even be able to keep the value of transfer within your own allowance. This could mean that there is no CGT payable at all. You’ll need to speak to an accountant to make sure you get all the numbers right.