My client owns 2 properties. One is his home, the other is occupied by his son and son’s disabled wife. My clients wants to gift son’s home to him, and has been advised (not by me) to put it into a discretionary trust then wind up the trust in a few months and gift the property outright to son at that point.
The value of the house is below the NRB, probably around £300k at present.
Can anyone guide me as to the most tax-efficient way to gift the property? I am most concerned about CGT, but very happy to receive advice on other issues!
Could they “swap” houses, in which case the CGT PPR relief would apply to the house in which your client is living?
Son doesn’t own a property at all, so it would be great if we could claim PPR relief for the time he has been occupying. If my client makes a simple gift to the son, this will be a chargeable disposal for CGT and the liability will be pretty big. But presumably the same will apply if client gifts it into a trust, rather than direct to the son. I’m going round in circles here on what is the best way to proceed!
Give thought to converting the second property to joint with son, tenants in common, with declaration of trust recording the value of the son’s interest transferred in the first year is a percentage with a £ value within the Father’s CGT allowances – repeat each year until full transfer of value complete.
This advice given gets you around the CGT and IHT but I would be concerned about it being a pre-determined tax planning wheeze.
Gifting a property to trust is a CLT and as below NRB, then no IHT. The CGT can be heldover on transfer to trust.
Once in trust, the property can then be gifted out within 10 years, with no exit charge (as entered at 0%) and the CGT heldover again. This results in the beneficiary receiving the asset at the original base cost.
PPR would be restricted during this period.
Assuming no mortgage therefore no SDLT.
Lucy Orrow CTA TEP
Lambert Chapman LLP
John’s suggestion will take a long time to play out, especially as the CGT exemption is due to be halved. and assuming that the value of the property increases. s19 TCGA will deny any benefit from joint ownership on the annual gifts.
Perhaps the DT route might be worth considering. I think there is a risk of the GAAR applying on a pre-planned early distribution out of trust to the son. The IHT associated operations rule might apply too but ironically the sooner the distribution the better because it operates to tax only any additional value over that transferred by the transfer into trust. These risks diminish significantly the longer the property is held in trust.
There is no way to make a PET to the son without CGT. If the asset is held until death there will be a CGT tax-free uplift but the asset will be liable to IHT then or perhaps on a later death of any spouse. The IHT payable, if any, will depend also on the then value of other chargeable assets. On the other hand a CLT now within the NRB might save all or part of that liability if survived by 7 years, especially if life assurance is cost-effective to cover the consequent impact on other assets (the CLT will take first bite at the NRB).
If the value of the property settled is within the father’s NRB it would be possible to distribute it to the son within the first 10 years at a nil rate of IHT and to claim hold-over relief for CGT. s226A denies PPR to the trustees and the son but not hold-over relief (subject to UK residence limitations). The son would thus lose PPR but he can’t claim it now as he doesn’t own the house nor can the father as he does not reside. So the current position is that on its sale there will be CGT. The position will be not much different whether the trustees or the son sell it and at least the son will have a mortgage-free enjoyment until then and the net sale proceeds to put down on any new house. And the gift and the distribution are free of SDLT.
Whether the DT route is worthwhile requires a consideration of the father’s overall assets, and those of any spouse, and the likely IHT cost if the property is owned at death, or at the death of the survivor; and so whether a CLT equal to the NRB is likely to succeed in reducing it. The downside of loss of the CGT-free uplift on death of the father and any surviving spouse must be factored in, as always, although the son will have that benefit once the house is distributed to him.
It also needs consideration of the son’s plans for the house, if and when it might be sold, and how much it might increase in value before then. If the house is unlikely to be sold for a very long time, especially if only after the death of the son and his wife, CGT is not so much of an issue nor perversely if it is to be sold in the short-term as its payment is a certainty! I can think of many clients in this situation with a large IHT estate and good liquidity and of an age such that IHT saving by gifts is desirable and practicable. They might be prepared to make a PET and pay the CGT (the latter constituting an immediate reduction in their estate but counterbalanced by the son’s future PPR) and with a good chance of avoiding IHT by 7 year survival, if only just.
Thank you so much to everyone who has taken the time to reply. Your insights have been so helpful, and are very much appreciated.