Q&A 64 – Capital Gains Tax When Gifting To Children

Question 64 - Capital Gains Tax When Gifting To Children

autodesk factory design 2017 for pc price Petula asks: “I bought a flat in 1999 for £46,000 and have rented it out since then. I am considering selling it for around £150,000. Should I live in it for a year so that I’m eligible for PPR relief?”

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Q&A 64  – Capital Gains Tax When Gifting To Children – Shownotes

Petula asks:

I bought a flat in Cambridge in 1999 for £46,000 and have rented it out since then. I am considering selling it to help my daughter buy a flat in London.

I estimate the selling price to be around £150,000.

Should I live in it for a year so that I am eligible for PPR relief? Also, am I eligible for letting relief if I have not lived in the flat?

(I am self employed, 62, and earn around £20,000 pa)

Thanks for your question Petula. I’m afraid that this answer might not be what you were hoping for, but here goes…

 

Your Capital Gain

Unfortunately, if you have never lived in the property as your only (or primary) residence, then you cannot claim either PRR or letting relief, and you will need to pay capital gains tax on your gain.

This will be calculated as follows:

Sales price – £150,000

Less purchase price – £46,000

Less capital improvement – £x

Less sales costs – £5,000

Therefore, assuming no capital improvements, you would have to pay capital gains tax on £99,000. You won’t be eligible for PPR relief or letting relief and I’ll explain why in a second.

So, you can then use your annual exempt amount of £11,100 to reduce your taxable gain to around £88,000. You have used the pronoun “I” in your question, so I’m going to assume you own 100% of the property yourself and don’t have a partner.

 

Calculating Your Tax

To work out your tax bill, you then have to take you current income for the tax year (the amount on which you pay income tax) and subtract it from the high end of the “basic rate tax level” including your personal allowance. For the 2015-16 tax year (see the government website for latest figures), this figure is £42,475, and so with your salary of £20,000 per year, this will leave £22,475. On this figure, you’ll pay 18% and on the remaining taxable gain you’ll pay 28%.

£22,475 x 18% + £65,425 x 28% = £22,364.50 tax to pay in this example.

So, let’s take a look at the reliefs in more detail.

 

 

Capital Gains Tax Reliefs

The PPR relief and letting relief are designed for people who only live in one property, or who have nominated a specific property as their primary residence. Therefore, say I lived in a house for 5 years, and then rented it out for 3 years before I sold it, I could claim PPR and letting relief against capital gains tax on that sale as it was my primary residence for part of the ownership period.

According to HMRC, when you own a combination of properties, you have two years to nominate which property is your primary. Therefore, Petula, if you have owned both your own property and this flat in Cambridge since 1999, you may struggle. If you haven’t made this election, HMRC will decide which of the two properties is your main residence, which will clearly not be the flat in Cambridge given that you have rented it out for 16 years.

Regarding your question of moving into the property, I believe that (due to the 2 year election rule), you’ll still not be able to elect this as your primary residence unless you sell your own home to create a different “combination of properties” and then move into (or elect) this property as your main residence.

You’ll find a link to the government guidance on PRR:

https://www.gov.uk/government/publications/private-residence-relief-hs283-self-assessment-helpsheet/hs283-private-residence-relief

 

Ask Your Question

This show runs three times a week and answers all of your personal finance questions. If you have any questions, please don’t be shy to ask. You can ask in three ways:

  1. Leave a comment on any of the Q&A podcast shownotes (including this one)
  2. Email me at moneystepper@gmail.com
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7 thoughts on “Q&A 64 – Capital Gains Tax When Gifting To Children

  1. Hi Graham,

    Firstly, thanks for a great site and interesting podcasts – I am aligned with you on the majority of your views.

    I listened to this question on my way home and had a few comments on it from a tax perspective which might also help Petula:

    1. As Petula’s daughter is a connected person the the sales proceeds must be equal to the market value for capital gains purposes. There is no suggestion that the agreed sales price isn’t the market value but it’s something to bare in mind. Any discount given would also be a transfer of value for inheritance tax purposes.

    2. In your calculation you must deduct taxable income from the basic rate band threshold to work out how much of the gain is taxed at 18%. I assume the £20,000 pa earnings is before the personal allowance so the amount you should deduct from £31,785 is £9,400.

    3. PPR and multiple properties is a technical area but the rules are that an election is necessary if an individual has multiple ‘homes’ that they actually use and live in. Therefore in this situation Petula has only ever had one home so no election has been necessary thus far.

    Therefore technically it would be possible to move into the Cambridge flat and make an election within 2 years of it being an available home. Petula would then get the last 18 months of PPR plus any additional if she lives in for more than 18 months (plus at least 18 months of lettings relief).

    Considerations of this method would be the loss of PPR on her other home for this period (you could get lettings relief for this section though possibly) and the quality of the occupation of the Cambridge home (especially if it is for a short duration). HMRC may have issue if Petula does not show this is her new primary resident (electoral roll, bank account, meeting neighbours etc.)

    Hope this helps

    • Interesting stuff.

      1. Very good point. I didn’t mention this because Petula hadn’t in her question, but this is definitely something worth pointing out. Thank you for bringing it up.

      2. Great spot. I overlooked that and, annoyingly, I double checked with this online calculator which give the same erroneous result:

      http://www.uktaxcalculators.co.uk/capital-gains-tax-calculator.php

      I’ve updated the shownotes above to show that.

      3. Interesting. I thought it was whether they had multiple homes that they earned and had an option to live in. Under your explanation, wouldn’t I always be able to get around the “election” issue if I hadn’t already made one by saying that I only used and lived one of the homes?

      Do you have any further guidance or links to the HMRC manuals which explore that in more detail because that is something that I’d like to get clarity on.

      Thank you so much for all your detailed comments. I’ve passed them on to Petula and I’m sure she’ll also be hugely grateful.

      Thanks.

      I may be misunderstanding your comment here regarding the PA and what is charged at 18%.

  2. Hi again,

    On 3.

    Indeed there is no election issue in this scenario as only one of the properties has been a ‘home’. An election only comes into play if she actually lives in two homes (e.g. a businessman who has a ‘london pad’ for the weekdays or somebody with a holiday home).

    In terms of backing:

    This manual explains an election is only necessary if an individual has two or more ‘residences’:
    http://www.hmrc.gov.uk/manuals/cgmanual/CG64485.htm

    This manual gives the basic definition of a ‘residence’ (with other manuals giving more detail):
    http://www.hmrc.gov.uk/manuals/cgmanual/CG64427.htm

    Overall they define it as “he dwelling in which that person habitually lives” – i.e. they have to actually live in the home not just a property they own and rent out.

    I do remember this wasn’t taught too well in my tax exams – seems a lot of people aren’t too clear on this.

  3. Very useful, many thanks. But one small question: you talk about gift, but in fact you are “selling” the property, not gifting it. If you truly “gift” the property to your children and you continue to live for 7 years, can this be treated as a sort of Potentially Exempt Transfer (as for IHT)? Or is it always assumed to be a market transaction, and even if no cash changes hands, and therefore is it is still liable to CGT?

    Many thanks

    • Unfortunately Peter, even if you truly gift the property to your children, the change of title deeds will be a triggering event for CGT. As you say, this will be exempt from IHT, but the capital gains is still due upon transfer.

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