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Tony Tax
Tony Tax, Tax Consultant
Category: UK Tax
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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I live in the UK but am an Indian Citizen. I have a Tier 1

Customer Question

I live in the UK but am an Indian Citizen. I have a Tier 1 that is getting converted to Permanent Residency and I intend to obtain my UK PR. However, being an international entrepreneur with businesses worldwide, I am non dom for tax purposes. I own some real estate in the UK. One of my brothers is not wealthy but can do with a bit of help. I wish to gift him one of my properties in the UK. It is perfectly tax efficient for him in India to receive this. However, would like to know if there are any inheritance tax or family tax law issues that one has to consider to be able to will this property over. Also what is the process of exchanging the title etc here.
Submitted: 1 year ago.
Category: UK Tax
Expert:  Tony Tax replied 1 year ago.
Hi.

If you are resident in the UK for tax purposes, then the gift to your brother of a property will be a disposal for Capital Gains Tax purposes at the open market value so that if the property is worth more than you paid for it, you may have Capital Gains Tax to pay on the excess of the gain over £10,900, the CGT exemption if te property is not a business asset that you use in a business. CGT is charged at 18%, 28% or a combination of the two rates depending on the level of the seller's/donor's income in the tax year of disposal. Take a look here for more information on CGT and property.

The gift will be a potentially exempt transfer for Inheritance Tax purposes. Should you not live for seven years after making the gift its value will be included in your UK estate when calculating your estate's liability to Inheritance Tax. Take a look here for more information on Inheritance Tax.

I'm not a property lawyer so I cannot give you alot of detail about the process you need to go through to transfer a property to your brother. I'd recommend that you have a solicitor do it for you. The page here from the Land Registry website gives some brief details. Assuming that your brother will not be taking on any responsibility for a mortgage secured on the property, there should be no stamp duty charge on the transfer.

I hope this helps but let me know if you have any further questions.
Customer: replied 1 year ago.

Thanks a lot. A few follow up questions:


 


A. Assuming that this is my primary residence or was


- I bought in 2007, lived there for a year. Then rented it out.


- Assume I dispose it to my brother this year in current tax year, or maybe I can live there for a few months to reduce CGT if necessary - we can optimize it.


- what will b the CGT? I bought for 480 plus costs and currently it is worth 700.


 


B. With regards XXXXX XXXXX Tax


- Assuming I gift this in May 2014, and I live on for 7 years, what will be the transfer tax on me? What will be the IHT be on my brother? What will he have to pay and when?


- Assuming the above transfer, but say I do not live on for 7 years, what will the transfer tax be on my brother?


 


C. I still have a mortgage on this - for 300k GBP, how will this impede the transfer?


 


Regards


Mohit.

Expert:  Tony Tax replied 1 year ago.
Can you tell me the month in 2007 you bought the property please. When exactly did you move out and let it (month and year)? Has it been let continously since it was first let? When you give the property to your brother will the mortgage be transferred to him or will you repay it before the gift is made?
Customer: replied 1 year ago.

Hello,


 


The Land Transaction document says - 20th July 2007.


I rented it out November 2008.


When I transfer I would have paid down the mortgage.


 


Cheers


Sid.

Expert:  Tony Tax replied 1 year ago.
Thanks.

Leave this with me for a bit while I do some calculations.
Customer: replied 1 year ago.

Sure - take your time, we can even continue discussion tomorrow.


 


 

Expert:  Tony Tax replied 1 year ago.
I'm drafting my answer now.
Expert:  Tony Tax replied 1 year ago.

Hi again.

A If you gift the property in May 2014, by that time you will have owned it for 83 months of which I'm assuming you will have lived it for 16 months (July 2007 to October 2008) and it will have been let from November 2008 to May 2014, 67 months. The gain will be £220,000 (£700,000 - £480,000).

The gain for the period the property was your main home will be exempt from CGT as will the gain for the last 36 months of ownership. That will account for £137,831 (£220,000 / 83 x 52). The remaining taxable gain of £82,169 will be that part of the letting period gain which won't be covered by the last 36 months of ownership (£220,000 / 83 x 31).

As the property will have been both your main home and let you are entitled to letting relief which is the lesser of:

1 £40,000,

2 the sum of the main residence gain and the gain for the last 36 months of ownership of the property which is £137,831 and

3 the letting period gain of £82,169.

Letting relief of £40,000 will reduce the remaining taxable gain to £42,169 and the annual CGT exemption of £10,900 will leave you with a net taxable gain of £32,169.

There are two rates of CGT, 18% and 28%. The rate or combination of rates you will pay will be dependent on the level of your income in the tax year of disposal of the property. Assuming you gift the property in the 2014/15 tax year and the tax rates and bands are the same as for 2013/14, one of the following scenarios will apply:

1 If your income in 2014/15 including the taxable gain is £41,450 or less then all the taxable gain will be taxed at 18%.

2 If your income in 2014/15 excluding the taxable gain is more than £41,450 then all the taxable gain will be taxed at 28%.

3 If your income in 2014/15 excluding the taxable gain is less than £41,450 but more than £41,450 when you include the taxable gain then part of it will be taxed at 18% and part at 28%.

B As a non-domiciled individual, only your UK based estate will be liable to IHT when you die unless you assume a UK domicile. See here for more on that. If you live for at least seven years after making the gift, you will have reduced your estate by the value of the gift successfully and no IHT will be payable on it by you, your brother or your estate.

If you die before the seven years is up, the value of the gift will be included in your estate for IHT purposes. Assuming your UK estate will be worth more than £325,000 (the current nil-rate band), your estate will pay IHT at 40% on the excess over £325,000. Your brother would only need to contribute to the IHT liability if your estate did not have enough assets and cash to pay all the IHT due. See here for more information on who pays IHT. So, on a property worth £700,000, the potential IHT is £280,000 but the longer you live after making the gift, the greater the potential for a discounted IHT liability on gifts made in the seven years before you die. See here under "Applying ‘Taper Relief’ to gifts" for more on that.

Your brother's estate would have IHT to pay when he dies on his UK assets assuming he doesn't assume a UK domicile and their value exceeds the nil-rate IHT band in force at the time.

There is only Stamp Duty to pay if cash is involved in a property transfer. A mortgage is cash for Stamp Duty purposes as you will read here. If you pay off the mortgage before you give the property away, there will be no Stamp Duty to pay. You may have problems with your lender if you want to give the property away as they have a charge over it.

Expert:  Tony Tax replied 1 year ago.
Hi again.

I can see that you have read my answers to your follow up questions several days ago. If there is anything you still need clarification on, please let me know. If not, would you kindly click Accept or rate my answer as OK or better so that I get paid. Thanks.
Expert:  Tony Tax replied 1 year ago.
Hi again.

Would you please accept my answer or rate it as OK or better so that I get paid. This answer took alot of work on my part and you asked some follow up questions which I also answered. Thanks.

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