Introduction

Many individuals these days own investment (e.g. 'buy to let') properties. The residential property market in the United Kingdom these days is such that the value of an investment property is likely to increase significantly during the period of ownership and letting. When the residential letting is sold (or gifted, as in the query below) by a UK resident taxpayer, the capital gains tax implications will need to be considered.

Query from TaxationWeb visitor ('mark_r')

I am thinking of giving to my son a property that I own outright and currently rent out to tenants. I am aware that as it was originally purchased over 30 years ago that this act will incur a significant capital gains tax (CGT) bill as the property is now worth over £200,000. At what point in the process would the CGT have to be paid - before or after I have signed over the property? Also, would my son be able to give me the money to pay this bill?

Editor’s Comments

The starting point in this query is to consider the potential exposure to CGT. It is often a good idea to calculate the possible tax bill before considering what (if anything) can be done to reduce or eliminate it. The property was owned at March 1982, when chargeable assets were 'rebased' for CGT purposes. This may give rise to higher base cost for the property, and therefore a lower CGT liability. In addition, was the property an only or main residence of 'mark_r' before it was let to tenants? If so, 'principal private residence' relief may be available for CGT purposes, possibly including 'lettings  relief' in respect of the period of letting. If the potential CGT bill is too high, as indicated below 'mark_r' could consider gifting the property to an appropriate trust, i.e. one which allows the chargeable gain to be deferred (i.e. 'held over') until a subsequent disposal or appointment by the trustees. However, such a gift would have inheritance tax implications, and there are other considerations, tax and otherwise, to consider as well. As always, specific professional advice is recommended. The payment of CGT is considered in the Forum responses below.

Forum responses included those reproduced below.

'Peter D' commented:

The CGT Bill will be due for payment by Jan 31st the year following the FY that you sold/transferred the property.

'Taxesclear.co.uk' commented:

I presume this is a residential property.

If you are in good health have you considered using a trust for this purpose.

The gain can be held over and no tax payable until your son sells the property.

If it is a commercial property then the rules for CGT are different.

Lee Young commented:

If your son wanted to pay the bill then yes he could.

If he will retain the property rather than live in it then you could defer the CGT bill till he sold the property at a later date by transferring the property to him via a trust. Although your accrued taper relief would be lost, if he held the property for 10 years or more then he would get the taper relief back. He would in effect pay your tax bill when he sold the property (and his own tax bill) but he could do this when it financially suited him best.

'mark_r' responded:

Thanks to each of you for this info. Lee Young, what do you mean about 'retaining' the property rather than him living in it? If he lives in it, does this create a different scenario?

'Taxesclear.co.uk' commented:

If he lives in the property it will be his Main residence for CGT purposes and therefore that period of occupation will be excluded in calculating the final CGT when the property is sold

Lee Young commented:

I made the distinction simply because if you receive a property with the benefit of hold over relief (the tax deferral mechanism I described above through ther use of the trust) then your son could then never get main residence relief on a subsequent disposal of the property at a later date.

If the trust is not used - ie you pay your CGT now - then he would get main residence relief for his period of occupation etc.

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