Capital gains tax on a gifted property

[DavidGH]

My parents own a number of flats in two large buildings that they have rented out out to generate the bulk of their their income over many years. They purchased one of the buildings in the 1960's and the other in the late 1980's.
They would now like to gift two of the flats to me (and my wife) as a way of reducing Inheritance Tax.
We understand all about PETs but were surprised to be told that we would have to pay Capital Gains Tax on the total value of each of the flats (around £180,000 each). Can you tell me if this is the case - and if so, given that we would pay CGT at 40%, the same rate as Inheritance Tax, whether there is any point in attemting any form of tax planning?
Thank you for your help.

[Anthony Nixon]

This is a complex area and you and your parents really need good professional advice on your personal circumstances. I’ll attempt to summarise the issues below. I’m assuming that the £180,000 value you mention is the value of the flats rather than the likely CGT bill on each.

Yes the basic advice is quite correct. CGT is payable on “disposals” and a gift is a disposal as much as a sale is. CGT is paid on a gift as if the asset given had been sold for its market value on the date of the gift.

In various circumstances gains can be “held over”. This means that no CGT is payable at the time of the gift. Instead the recipient effectively takes over the donor’s CGT history.

If a gift is a PET, hold over is available only if the assets concerned are assets of a trade. You can however get hold over relief if the gift is a chargeable transfer (for inheritance tax) rather than a PET.

It is not necessary actually to pay inheritance tax to be able to obtain hold over, provided the gift is one on which inheritance tax would be payable if it were over the threshold.

You have to watch the value of the total gifts made by your parents. If neither has made chargeable transfers in the last seven years gifts of £360,000 by the two of them will fall within their combined inheritance tax free amounts. (If they are over the inheritance tax threshold there are other possible strategies.)

Bear in mind that you will have to pay CGT if you decide to sell in due course. You will start again at zero taper relief without credit for any taper earned by your parentsÂ’ ownership. If either of your parents dies within the next seven years you may have more CGT and inheritance tax combined than if they had not made the gift.

Anthony Nixon ATII
Associate Solicitor
Lester Aldridge Solicitors
Russell House
Oxford Road
BOURNEMOUTH BH8 8EX

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E-mail: anthony.nixon@LA-Law.com
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