If I sell my buy-to-let flat to my daughter, will I have to pay any tax on it?

23 January 2018

Q

I bought a buy-to-let flat in 2012 and rented it out, but for the past two years and four months my daughter has been living in it. I bought it for £245,000 and it is presently valued at £400,000. I have £163,000 left on my mortgage. I would like to sell it to my daughter for £163,000. Would I have to pay any tax if I sell it to her? 

From
TS/London

A

Assuming the flat has never been your main residence, you would be liable for capital gains tax (CGT) on the increase in value from the date of purchase to the date of sale. However, this would be calculated according to the market value, not your proposed sale price. The gain for CGT purposes would therefore be £155,000 (£400,000 current value minus the purchase price of £245,000).

From this you can deduct your annual CGT allowance – £11,300 for the 2017-18 tax year. You can also deduct any expenses incurred in enhancing the property (but not routine maintenance or repairs), plus any legal and professional costs for buying and selling it.

Once you have worked out the net gain, you will pay the tax at 18% if you are a basic-rate taxpayer or 28% if you are a higher or additional-rate taxpayer.

There may also be an inheritance tax (IHT) issue. If you sell the flat for £163,000, the difference between this selling price and the market value of the property could be considered to be a gift to your daughter of £237,000.

While there would be no immediate inheritance tax charge as it is within your nil-rate band, it would still be taken into account for inheritance tax if you died within seven years of the gift. This is because gifts made less than seven years before a person’s death have to be included in that person’s estate when calculating whether any IHT is due. 

Francis Klonowski is principal of Klonowski & Co in Leeds. Find out who our experts are on the Ask the Experts homepage.