Best way to gift an expensive flat to a son?

[L.F.]

An elderly friend owns a flat, in which he lived some years ago. It is now occupied by his son. The flat is in London and is worth about £1 million. There has been a huge capital gain (almost £1 million) over the years. He and his wife (much younger) also have a main residence which is in joint names. He wants to know the best way of giving the flat to his son, who has quite limited means. I am thinking of three options:

1) If he was to give it to him now I believe the son would immediately be liable to pay CGT on it (a chargeable event). By the way, my friend is unlikely to live for much longer.

2) If he leaves it to his wife in his will I think she would receive it IHT free. What would be the position if she immediately gave it to her son? Would he be liable for CGT when it was transferred to him, based on the value at the time, or not (in other words, does the CGT clock reset back to zero once it’s passed on to his wife)? Presumably any subsequent increases in value would be subject to the mother’s seven year tapered IHT relief and he would also benefit from the residence nil rate band (RNRB).

3) If he was to leave it to his son in his will I imagine he would benefit from my friend’s NRB plus RNRB, both of which are increasing over the next few years.

Could you please advise which of the options would be most tax-efficient, or perhaps suggest another option?

[maths]

CGT

If left to son on death then son acquires property at its then market value for CGT purposes.

If left to spouse on death then spouse acquires property at its then market value for CGT purposes.

Lifetime gift to son precipitates CGT charge.

Lifetime gift to spouse precipitates no CGT charge (although goes across at original cost).

IHT

If left to son on death significant IHT charge (even allowing for NRB and RNRB).

If left to spouse on death then no IHT charge.


Probably best bet would be to leave property to spouse on death. Thus, no IHT and uplift to market value for CGT but no CGT payable.
Surviving spouse to gift property to son soon after death. Thus, no CGT (as no movement in mkt value between death and date of gift) and gift a PET for IHT thus giving rise to no IHT if surviving spouse survives for 7 years. Son needs to acquire asap so that on a future sale by him private residence relief will apply for CGT.

[L.F.]

Thank you very much for your advice, maths. It sounds almost too good to be true that the legislation allows the historic capital gain to be wiped out when leaving a second property to a spouse. My friend will be very grateful.