In this article, we address a number of questions such as if it is possible to transfer any property into a trust and if you can avoid capital gains tax by doing so. So, without further ado, let us dive right in and understand how to use a trust to transfer your property to your children without paying the capital gains tax.
Transfer A Property Into A Trust While Avoiding Capital Gains Tax
There are a number of reasons why people might wish to transfer their investment properties into a trust so that it finds its way back to their adult child. Here are a few of them:
- Offers the adult child an income
- Reduces the asset value for inheritance tax purposes of the parent
- Reduced income tax payment for the payment (particularly if you pay exorbitant taxes)
Therefore, there are countless people in the UK who wish to transfer properties from their estate to their children while avoiding the capital gains tax as well as the inheritance tax. Typically, you will be liable for a capital gains tax if you want to transfer a BTL or Buy To Let property to your children. The reason is that according to HMRC, the gift of asset to a connected party is considered disposal at market value and it is deemed that the parent receives the property’s market value, even if it was given away absolutely for free. Hence, capital gains tax is based on less purchase price, market value and less capitalised costs of refurbishment.
In addition to that, the rates at which you must pay the capital gains tax on “Buy To Let” properties are typically 18% and 28% for basic rate taxpayers and higher rate taxpayers respectively. This is after removing their annual capital gains tax allowance of £12,000 for 2019/20.
Using A Trust To Avoid Capital Gains Tax
In order to use a trust to mitigate the capital gains tax, the legislation to keep in mind is Section 260 – Holdover Relief of TCGA, 1992. According to this law, the capital gains can be held over when an asset transferred to the trust qualifies as a Chargeable Lifetime Transfer for the purposes of Inheritance Tax. In most cases it will avoid a Capital Gains Tax charge from arising. This means that if the property is transferred to a discretionary trust, an IHT charge of 20% will apply on the amount over the Nil rate band The NIL rate band for 2019/20 is £325,000 per person. On the contrary, in case the settlor does pay the inheritance tax rather than the trustee, there shall be more loss from the estate of the settlor. Please note if the child is minor, it will become a ‘settlor-interested’ trust and the Holdover relief can be denied.
All these calculations are quite complicated, but you can go through them on the legislation pages of the HMRC website. This complication increases even further if there exist transfers in the previous seven years. This also includes IHT relief for weddings, gifts, etc. Therefore, in order to make an informed decision, you must get in touch with a Property Tax Specialist like DNS Accountants.
Capital Gains Tax On The Asset’s Disposal For The Child
It is important to keep in mind that deferring the liability of capital gains tax is possible, but only if you follow all the steps properly. It can be a rather complex tax, and you do not want to be caught non-compliant to the existing norms of the land. In simple words, if there has been a £450,000 asset transfer and the father made use of the holdover relief, the cost that goes to the child will be the original purchase price.
3% SDLT Surcharge Considerations
In this scenario, your child will be required to pay the SDLT surcharge of 3% if he/she does not have a home already and you transfer him/her the property out of a trust. The reason is that they already have a property of their own. Hence, it is crucial that you plan strategically before going for this approach because it might not be possible for your children to buy a home of their own without this additional tax.
How To Implement This Approach As Suggested By The Property Accountants At DNS Accountants
It cannot be disputed that it is one thing to comprehend the theoretical aspects of a concept and another entirely to execute it successfully. This is precisely why we share with you a step by step guide to help you implement the strategy perfectly.
- Start by identifying a property with a value of up to £325,000 for husband and wife together it can be £650,000 or below the inheritance tax threshold. If you choose a property above this value, you will be immediately liable to pay the inheritance tax of 20% in case the settlor has paid it.
- After that, transfer the property you have selected in a trust (free of a mortgage) and then calculate the inheritance tax liability.
- Then, after a period of three months since the creation of the trust, transfer the chosen property to the adult child from the trust. At this point, calculate the exit charge of inheritance tax.
- Finally, submit the IHT100 form after completing it within a year of the said transfer.
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Disclaimer. Please note that nothing contained in this article should be construed as taxation advice. The purpose of the article is simply to outline the broad terms of the arrangement. You should always consult DNS Accountants and your professional advisers to ensure that the planning is suitable for your circumstances.