Writing for Taxation magazine, BKL tax adviser Terry Jordan answers a reader’s query on transferring part-ownership of property to a family member.
‘I have a client who bought the family home some years ago. It was purchased by the client, his wife and his daughter in one-third shares.
The parents and the daughter’s family have occupied it as their only or main residence since acquisition.
The mother and father each wish to transfer one-half of their share in the property to their daughter, but the two families will continue to occupy it.
The market value of the one-third share the parents wish to transfer is £400,000. They are considering two options. First, they could make an outright gift to their daughter. Alternatively, they could each make a gift of £200,000 to her and she could buy a one-third share from her parents.
In either scenario I believe that only or main residence relief for capital gains tax will be available to the mother and father on the disposal either by way of gift or cash.
If the transaction is carried out by way of cash, stamp duty land tax will be applicable; if carried out by way of gift, it will not.
I am concerned about the implications of either transaction for inheritance tax and a possible charge to pre-owned asset tax.
Readers’ observations would be most welcome.’
Query 19,279– Homer.
Reply by Terry Jordan
Homer’s clients, comprising parents and their daughter, own their property in equal shares, presumably as tenants in common. A gift by the parents of half each of their respective one-third shares has been mooted and Homer is concerned about the implications for inheritance tax and the income tax charge on pre-owned assets (POAT). There should be no adverse capital gains tax implications because main residence relief will apply to the parents’ disposals and the gifted shares will also benefit from relief on an eventual disposal by the daughter.
The daughter will end up with two-thirds of the property and the parents will retain one-sixth each. Strictly a ‘before and after’ calculation would be necessary to determine the loss to the parents’ estates which will be the figure on their inheritance tax ‘clocks’ for seven years. The parents will be relying on the sharing exemption from the gifts with reservation of benefit provisions in FA 1986, s 102B(4). It is not necessary for the shares to be equal for the statutory provision to apply, but it is essential that the donors do not receive a benefit after the gift by, for example, the daughter meeting more than her share of the running costs of the property. It is understood that HMRC looks closely at the situation if the donors have retained only minimal shares in the property.
When the inheritance tax provision is in point, FA 2004, Sch 15 para 11 exempts the arrangement from the pre-owned assets tax charge. Gifts of shares in the property are to be preferred over gifts of cash.
It is worth noting that, if the ultimate shares are owned equally, the property should be owned as tenants in common and not as beneficial joint tenants on a strict interpretation of the wording of s 102B(1).
The article is also available on the Taxation website.
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