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Where Taxpayers and Advisers Meet

CGT on transfer of rental property to brother

bd6759
Posts: 3344
Joined: Sat Feb 01, 2014 3:26 pm

Re: CGT on transfer of rental property to brother

Postby bd6759 » Mon Jun 01, 2015 3:57 pm

Does it really matter? Sell the house and pay the CGT. Even if you could persuade HMRC that your brother owned property, he would have a CGT liability just the same.

Adam Khan
Posts: 23
Joined: Mon Jan 30, 2012 11:19 pm

Re: CGT on transfer of rental property to brother

Postby Adam Khan » Tue Jun 02, 2015 6:27 am

Yes it does matter.

If I transfer the property to my brother I would have to pay £60k CGT.
My brother is going to live in the property not sell it.
So all that has happened is £60k has been paid to the taxman.
£60k is a lot of money

Peter D
Posts: 10668
Joined: Wed Aug 06, 2008 3:37 pm

Re: CGT on transfer of rental property to brother

Postby Peter D » Tue Jun 02, 2015 9:15 am

Was the solicitor that purchased the property aware of this arrangement and did you take any professional advice prior to the purchase. I suspect not. Regards Peter

Ian McTernan CTA
Posts: 1232
Joined: Wed Aug 06, 2008 3:02 pm
Location: Bedford
Contact:

Re: CGT on transfer of rental property to brother

Postby Ian McTernan CTA » Wed Jun 03, 2015 4:08 pm

Here's what the taxman sees:

You bought the property, paid the mortgage, reported the income. There is nothing in writing to state that the property was being held in a bare trust for your brother. Your brother has made gifts to you over the years which you have applied against the mortgage. The only point that could be discussed is the deposit, and even then it is unlikely that the Revenue would treat this as anything other than another loan or gift from your brother to you without conferring any rights of ownership. From HMRC's point of view, you are now trying to avoid paying CGT by claiming this was never yours but without any back up paperwork. If you had let the solicitor know at the outset they could have drawn up the proper documents in minutes.

Surely the easiest solution would be to just let your brother move in and live there rent free (well, pay a rent equivalent to the mortgage payments, or make separate payment to cover the mortgage).

The only other option is to try and persuade HMRC that it was always the intention for your brother to own the property provided the payments he has made are well documented and clearly state what they are for (pretty unlikely). You could try and tell them that the original purchase price was 275k and that to date he has repaid you £150k, and that when he can raise the funds to pay off the other £125k the house will be transferred to him. If you are very lucky and the Tribunal agrees, then you will achieve the CGT saving you are after.
McTernan Associates Ltd
Chartered Tax Advisers
Bedford
Email through link on website:
http://www.imcternan.com

LozaACCS
Posts: 1504
Joined: Wed Aug 06, 2008 3:55 pm

Re: CGT on transfer of rental property to brother

Postby LozaACCS » Wed Jun 03, 2015 9:19 pm

It does look grim

If evidence existed of the abortive application by your brother and further assuming that his payments could be matched with the mortgage liabilities arising then it is possible that the property was held on constructive trust (rather than bare trust).
It is clearly going to be difficult to win and it may be better to accept that you are where you are and plan accordingly.
I hear what you say regarding the intention to put the asset into the right box, to this extent you might consider;
1 Gift the property into a discretionary trust with your brother among the class of beneficiaries, this will trigger a gain of 217K which can be held over under S 260 TCGA 1992.
No CGT liability arises and the trustees base cost going forward is 283K.
The problem here is that PPR relief will be denied to the trustees because of the gain held over, so
2 The trustees distribute the property to your brother after say 1 year, an IHT exit charge would arise of app 1k, assuming the property is then worth say 520K, the gain would be 237K, this can again be held over under S260 and your brothers base cost would be 283K.
Your brother could then live in the property and accumulate PPR accordingly.
The problem will be the probable reluctance of the lender so you would need to consider paying off the mortgage first.

taxmenot
Posts: 8
Joined: Wed Jun 03, 2015 1:54 pm

Re: CGT on transfer of rental property to brother

Postby taxmenot » Thu Jun 04, 2015 11:29 am

Hi,

In my opinion legal advice is what you require in the first instance before even looking at the tax implications of the transfer to your brother. A transfer to your brother will be at market value, if the case did not have the added complications.

I would have thought that you would need clearance from your mortgage provider before transfering the property. This is essential for several reasons notwithstanding the fact that the bank has a legal charge over the property. Given that the ultimate beneficial owner will be changing from you to your brother, they will assess your brother's suitability as a lender and will have to do their due diligence.

Hope that helps.

Kr

Adam Khan
Posts: 23
Joined: Mon Jan 30, 2012 11:19 pm

Re: CGT on transfer of rental property to brother

Postby Adam Khan » Sun Jun 07, 2015 9:23 pm

Wow thanks for the detailed responses Ian, Loza and taxmenot, I did not expect that.
Ian - I agree, will probably end up leaving the property on my name and my brother can live in it.
Loza - Discretionary trust sounds interesting, I did not know that was an option, the property will probably be paid off in a few years, so that's given me an option to think about now :-)

Another thought occurred to me - I could just gift the property to my brother in say 4/5 stages over the next few tax years and calculate the amount to gift, to set the CGT payable each year to nil (of course would have to work out relevant percentage to gift each year for this to happen)
For example I could transfer 20% of it to him for the 1st year. The property would still remain as a rental property so, 20% rental income would be his and 80% mine. And this is what would be reported on the tax returns each year. The 2nd year transfer another 20% and report relevant rental income on tax return for him and me.
Would this be ok? Sounds too easy though.
What would the process for this be? Is it just a legal doc each year?

Adam Khan
Posts: 23
Joined: Mon Jan 30, 2012 11:19 pm

Re: CGT on transfer of rental property to brother

Postby Adam Khan » Mon Jun 08, 2015 6:47 am

Just been reading up on discretionary trusts - sounds like I will just be paying IHT instead of CGT if I go down this route?? Albeit at a lower percentage 20% IHT instead of 28% CGT.

taxmenot
Posts: 8
Joined: Wed Jun 03, 2015 1:54 pm

Re: CGT on transfer of rental property to brother

Postby taxmenot » Mon Jun 08, 2015 10:50 am

You would also have the ten yearly charges and exit charges if you choose the DT route. In order for the trust to be a discretionary trust, you have to specify a class of beneficiaries. The Trustees whom you have to appoint (additional annual management cost) will be an excluded beneficiary.

Another thought, if you gift the property to your brother and you benefit in some form then there is a risk of Gift of Reservation of Benefit which is an anti-avoidance may catch.


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