Reducing IHT by Transferring from Sole to joint tennant ownership

[shmoo]

My dad has two properties which he would like to transfer to me and my brother as joint tennant ownership. So for property 1, the ownership is transferred from my dad to my dad plus my brother and for property 2, the ownership is transferred from my dad to my dad plus me. The purpose of doing this is to reduce our IHT burden after the passing of my dad. Ideally, if he survives the 7 years the burden would be zero.

The question I have is, does the transfer of ownership to joint tennant (as explained above) have any capital gains tax implications? I understand the this transfer would come under the 'gift' umbrella.

I would like to know if there are any CGT implications for the above described transfer.

[maths]

AssumImg the properties have never been lived in by father on each transfer there would be CGT charges on any capital gains arising.

If the properties are mortgaged there may be SDLT consequences.

[shmoo]

Father is currently living in one property and the other is being rented out. Both properties have been paid off - so no mortgage.

Is there any capital gains tax on me or my brother when dad transfers ownership of each property to a joint tennant arrangement?

Or is capital gains tax only charge if me or my brother decide to sell the properties?

[maths]

Is there any capital gains tax on me or my brother when dad transfers ownership of each property to a joint tennant arrangement?

No. Any CGT charge will be on father.

Or is capital gains tax only charge if me or my brother decide to sell the properties?

Correct. The vendor is the one charged to CGT.

If father lives in one of the properties then it would not make sense for him to gift any part of this property (assuming neither you nor brother also live there).

Better for him to gift his whole interest in the buy to let, 50/50 to you and brother.

[shmoo]

No. Any CGT charge will be on father.

Sorry, probably a silly question, but just to clarify, is there a CGT charge to my father for changing ownership from sole to joint tenant?

If father lives in one of the properties then it would not make sense for him to gift any part of this property (assuming neither you nor brother also live there).

Better for him to gift his whole interest in the buy to let, 50/50 to you and brother.

My father does live in one of the properties and neither me or brother live there.

Why is it better for him to gift his whole interest in the buy to let property? What are the benefits of doing this?

[AGoodman]

A gift of either property will be treated as a sale at market value for CGT.

There may be no CGT to pay on the property your father lives in as he will benefit from principal private residence relief, which could be 100% if he has lived in it for virtually his entire period of ownership (there are some allowances for short rental periods etc).

The reason maths explains there is little point in your father transferring the property he lives in is that it would be treated as a gift with reservation of benefit (GROB) - ie the half share he gives away would be treated as remaining within father's estate while he continues to live there and for 7 years after he leaves. You would also lose the CGT uplift on death on the half share that only applies if he is the actual owner on death.

If father wants to reduce his estate for IHT then, as maths states, he would be better off transferring the whole of the BTL as the GROB provisions would not apply and it would leave his estate after 7 years.

AG

[shmoo]

If father wants to reduce his estate for IHT then, as maths states, he would be better off transferring the whole of the BTL as the GROB provisions would not apply and it would leave his estate after 7 years.

If he was to do as advised, my father would have to pay CGT on the BTL property as this transfer of ownership would be treated as a 'sale at market value'? Please kindly confirm.

Regarding the other property, the one he is currently and will continue to live in, is there is no way of avoiding or reducing IHT?

[AGoodman]

1. Confirmed - as to half of the gain because he is effectively retaining on half as a joint tenant.
2. No, not really, as otherwise everybody would be doing it. The only possibility is that he pays full market rent on the one half given away, which would involve your father finding the cash to pay it and the recipient paying income tax on the rent.

AG

[shmoo]

If my father transfers the entire property he is currently living in to my brother and in addition pays my brother rent - will this arrangement remove the CGT charge because of principal private residence relief and also potentially IHT should he survive 7 years?

[AnthonyR]

If your father gifts the property he lives in it should be exempt from CGT if it's always been his main home.

If he then rents it at full market value from your brother (which will be taxable income for your brother) it will not be a gift with reservation of benefit and as such after 7 years will be out of his estate. However, bear in mind the cost of renting the property over 7 years and the tax bill as a result. If your brother is seen to be passing that rent back to your father it could be seen that he's still retaining the benefit and it remains in his estate.

Also bear in mind that your brother is exposed in full to CGT from the date of transfer as he would not be entitled to PPR relief.