I have owned a small property since August 1985. My brother moved into it in August 2011 when I moved house and has lived there rent-free since then.
Please could you advise what the tax implications would be if I transfer the property into my brother’s name?
Transferring the property into your brother’s name is classed as a disposal of assets and means you may be liable for capital gains tax (CGT).
The gain is calculated as the difference between what you paid for the property back in 1985 and the current market value – irrespective of the value agreed with your brother. This means even if your brother isn’t paying you market value for the property, the gain is calculated as if he has done.
However, there are ways you can reduce this bill. First of all, I assume the property was your main residence until 2011. If that is the case, you can claim ‘private property relief’ for the years you lived there plus the last 18 months of ownership. To work out the reduction, you need to calculate the number of months the property was your main residence then add on the 18 extra months. Divide this figure by the total months you have owned the home (August 1985 until now). The resulting percentage is the amount you can deduct from the capital gain.
For example, let’s say you owned the property for 31 years and let it out for five years and the gain is £100,000. The private residence period is 312 months (26 years) plus 18 months for the final period of ownership. That is 330 months out of the total 372 months you have owned the property or 88.71%. This is the amount of relief you can claim against the capital gain.
You can also deduct sums that you have spent improving the property during your brother’s tenancy, plus the costs of transferring the property. You will also get an annual capital gains allowance of £11,100 that will help reduce the gain even further.
Whatever gain is left after all that is taxed at 18% if you are a basic-rate taxpayer and 28% if you are a higher-rate or additional-rate taxpayer.
You also need to consider the inheritance tax (IHT) implications. When you give the property to your brother, it will be classed as a ‘potentially exempt transfer’. This means that it will still be classed as part of your estate for IHT purposes for the next seven years – although the amount of tax due would gradually decrease with every year that you live once three years has passed. After seven years, the property would no longer be liable for IHT.