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taxadvisor.uk, Chartered Certified Accountant
Category: UK Tax
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Experience:  FCCA - over 35 years experience as a qualified accountant (UK based Practitioner)
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Im a bit confused about IHT , CGT and any other tax which

This answer was rated:

I'm a bit confused about IHT , CGT and any other tax which might be payable when gifting rental properties to children.

My wife and I own 2 rental properties and we wish to gift one of them to our eldest daughter. Our accountant advises that we must first be able to show that we can survive adequately without this rental income. Then, as the property is worth over the IHT threshold, there will be an immediate IHT element to pay, and possibly a CGT element but this can be deferred for 10 years.

If this is the case, then where the does the "7 year rule" come in on gifting rental properties?

He advises that it might be better to create a discretionary trust and gift the property into that, we remain the trustees who control the distribution of the income, and our daughter is a beneficiary who then "benefits" from the income. But doesn't it cost to create a trust? Please help!!

Hello and welcome to the site. Thank you for your question.

 

If you gift the property to your daughter, it would be deemed gifted at market value.

The recipient of the gift receives it tax free.

 

Tax implications for your consideration are:

 

Capital gains tax -

The difference between market value and the cost price (including associated costs of buying and transfer of property) would be your gain and it would be chargeable to Capital gains tax. As the property is jointly owned with your wife, each owner would be able to claim gains annual allowance of £10,900 against the gain and the balance would be charged CGT at 18%, 28% or a combination of both depending on your total taxable income in the tax year.

 

Inheritance tax -

This gift would be regarded as a potentially exempt transfer for IHT purposes and the seven-year rule would apply. If you survive for 7 years after making the gift then it would be exempt from your estate for IHT calculations.

 

More information of seven year rule can be found here

http://www.hmrc.gov.uk/inheritancetax/pass-money-property/exempt-gifts.htm#4

 

I hope this is helpful and answers your question.

 

If you have any other questions, please ask me before you rate my service - I'll be happy to respond.

Customer: replied 3 years ago.

Ok thanks for this answer.


 


Is there any difference to any of the costs if we set up a discretionary trust? Or is gifting to the trust the same as gifting it outright to an individual? If that is the case then what is point of trusts??

Customer: replied 3 years ago.

Sorry - do I have to make another payment to ask the additional question?

If it is related to your original question then no
Customer: replied 3 years ago.

Ok - yes this is related to my original question.


 


Is there any difference to any of the costs if we set up a discretionary trust instead of gifting the property direct to our daughter? Or is gifting to the trust the same as gifting it outright to an individual? If that is the case then what is point of trusts??

Sam thank you for your reply.

There is difference on CGT treatment when you sell an asset held in trust.

 

You lose control of the asset if it is gifted outright where as the trustees remain legal owners of assets held in a trust.

 

More information on CGT for Trusts can be found here

http://www.hmrc.gov.uk/trusts/cgt/calculating.htm#5

 

More information on discretionary trusts can be found here

http://www.hmrc.gov.uk/trusts/types/discretionary-accum.htm

 

I am not an expert on Trust law and I would recommend you seek legal advice on merits of gifting direct or via discretionary trust before you make your final decision.

 

I hope this is helpful and answers your question.

taxadvisor.uk and 2 other UK Tax Specialists are ready to help you
Customer: replied 3 years ago.

Ok thanks - I appreciate you may not be fully conversant with Trusts but does "Just Answer" have anyone who is? Are you able to forward my query to someone?

Sam, thank you for your reply.

Trust law would be covered by Lawyers on the site and they would regard it as separate question..

If you are happy and there are no more issues related to your original question then I will appreciate if you would kindly rate the service I provided to you.

I hope this helps.
Sam, I thank you for accepting my answer.

Best wishes

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