Passing on a buy to let (BTL) property to your child is an excellent investment in their future. They’ll benefit from both the value of the asset and the income it generates. However, if you have a property you’re looking to transfer, you need to be aware of the Capital Gains Tax (CGT) and Inheritance Tax (IHT) implications.
About CGT and trusts
The CGT liability of a property is calculated when it is transferred—even if it’s given away for free—by subtracting the purchase price and refurbishment costs from the market rate. Assuming you’ve already used your annual £12,000 CGT allowance, the basic rate for BTL properties is 18% (or 28% for higher rate taxpayers).
If you’re looking to avoid this headache and transfer a BTL property to your child in the most tax-efficient way, a trust is the way to go. By moving the property through a trust, you reduce your income tax—which is particularly important if you’re already a high rate taxpayer—as well as providing an income to your child and reducing the amount you need to pay in IHT.
What to be aware of
While it’s relatively straightforward to avoid paying CGT and IHT when transferring a property, there are some important points to be aware of.
First, you can’t transfer assets to a minor. Assets passed from a parent to a minor remain an asset of the parent’s estate and, under tax law, any income from the asset counts as income for the parent. Additionally, you can’t carry out an asset transfer strategy if you haven’t paid off the mortgage on the property.
Be sure to plan out your strategy well in advance so that you aren’t surprised by unexpected charges. Be careful, for instance, not to leave a property asset in a trust for more than a decade, as this can trigger a tax charge. Certain taxes are unavoidable, however, and you need to factor in things like trust exit charges.
Selecting the strategy
This strategy for transferring via a trust uses Section 260 of the Taxation of Chargeable Gains Act. When choosing a BTL property to transfer to a child, we advise choosing one under the IHT threshold of £325,000. Properties worth more are subject to 20% IHT. Once you’ve selected an appropriate property, it’s a matter of following three steps.
First, transfer the property into a trust and determine its IHT liability. Next, at least three months after establishing the trust, transfer the property to an adult child and calculate the exit charge. Finally, fill in and submit the IHT100 form within a year of the transfer. That’s it.
While transference of property assets is relatively straightforward, there is a lot of potential for clerical errors and we’d always advise taking professional advice before finalising your CGT/IHT strategy. Even a quick, one-hour consultation can mitigate any potential issues and save you money.
Simon Misiewicz, Property Tax Specialist at Optimise Accountants