Capital Gains Tax: To transfer or not to transfer, that is the question
This year (2023) has seen changes to Capital Gains Tax (CGT) that are impacting people across the country. Cuts to individuals’ annual CGT allowance mean a review of finances for many. Those who currently own a second property might be considering making changes to help mitigate their tax bill.
With goals to bring the UK into line with European allowances, the government has cut individuals’ annual allowance from £12,300 to £6,000 for the 2023/24 tax year. Further cuts in 2024/25 will see the annual allowance drop to just £3,000. The good news is that transfers between married and civil partners are still exempt.
CGT on property is charged at 18% for basic taxpayers and 28% for higher rate taxpayers. In some cases, one partner may be a basic-rate taxpayer, or they may not pay income tax due to earning below the threshold. An option here could be to transfer part or all ownership to them to reduce income tax on rental profits and future CGT. Any landlord needs to register with HM Revenue & Customs for self-assessment so will need a Unique Taxpayers Reference (UTR). Therefore, it is important to remember that the partner will have to bear the cost and time of sending HMRC a tax return.
As with any change to ownership of property, there are some considerations to be aware of:
- a stamp duty land tax charge may be payable if there is a mortgage
If the property in question has a mortgage charged against it, there may be a stamp duty charge involved in the transfer. This will still be the case even if the transfer is an outright gift to the recipient, as HMRC will use the market value to calculate this. You will pay stamp duty on the proportion of the outstanding mortgage that belongs to the share of the property being transferred. If the share of the mortgage plus any cash paid (known as the chargeable consideration) is below £250,000 then there is no stamp duty to pay.
- there are different rules with divorce proceedings
While there are different rules when a transfer of property happens as part of a divorce, there should be no tax issues, if done correctly.
From 6 April 2023, under new rules, there is a no gain, no loss transfer for up to three years after the year in which the couple cease to live together as spouses or civil partners, and for an unlimited period where the transfer occurs as part of a formal divorce agreement.
If the property is a mixed-use asset, such as a flat with a commercial property below, then the 2 parts need to be split out, as the commercial premises will be taxed differently.
If the property was ever lived in as your main residence, then there is relief against CGT for the time you lived there.
Considering a transfer of share of property is a good opportunity to think about your estate planning. People may put off a transfer of share of property due to fears of cost implications, and how complicated or difficult the process could be. HMRC require a Deed showing the change in ownership. With AFH Trusts & Estate Planning, we can prepare a deed of trust to demonstrate the change you are making, and this document will be sufficient for HMRC.
Making a transfer of a share of your property in any circumstance should not be carried out without careful consideration as to whether this is the best move for you. Enlist the help of a financial adviser today to understand the finer details and your options.
At AFH, our advisers are able to provide advice relating to estate planning.
Speak to an expert today.
Wednesday 9 August 2023