Should we gift DD a (small) house?

[stayathomegardener]

I'm not sure if I've thought this through properly.
We have a rental property that we purchased and rebuilt after it pretty much fell down 27 years ago.
If we sold it capital gains would be huge so I'm wondering if we should gift it to DD.
I understand if we did this we couldn't profit from the rent as it wouldn't be a gift.
Anything else I should think about?

I am very hazy on this but I believe there are tax implications with gifting an asset worth a substantial amount so you should speak to an accountant first.

However, that aside, I would ask myself whether it is a good idea to give a property to one's child - imo, there should be an element of working towards something so valuable - and, from the child's pov, I would wonder what strings were attached... Perhaps, if you would like your daughter to have it - and it suits her needs - then you could discuss her buying it at a very advantageous price?

Op explained why, capital gains tax.

You can gift it as a personal equity transfer and once you have survived 7 years after gifting it the asset is out of your estate. If you die within the 7 year period your estate may be liable to inheritance tax depending on size of your estate and how long after the gift you died. No capital gains tax implications.

As you say though you cannot receive any of the rent as this would then be a gift with reservation.

Would DD live there? Or continue to rent it out and receive the income? Any other DC to consider or is she your only heir? How would you feel if she sold the house and blew the proceeds on shoes or cars or on a daft business venture?

I think it is a wonderfully generous gift - if you would leave all your estate to her anyway then it is very sensible inheritance tax planning.

If you gift it to her then you have to be prepared to allow her to do with it as she wishes otherwise it could drive a wedge between you.

Thank you for taking the time to respond.
I have booked an appointment with an accountant next week hence my pondering.

To answer some questions DD 18 is our only child, she also has a long term health condition that may prevent her working despite being very driven.
It's hard enough for young people to buy nowadays, although we worked very hard to rebuild the house ourselves we have benefited hugely by circumstances.
If DD chose to sell and do something else with the money that would be fine by me, ideally would buy elsewhere or abroad which would benefit her health, I would be very surprised if she frittered it away but appreciate that could happen.

I'm not an expert but I think you can avoid capital gains if you actually moved into this house and lived in it for three years. But of course it might not be convenient to do this. I think there are tax implications with a gift unless it's for a specific event like a wedding and even then there might be limits. Definitely see an accountant. Selling it to her might be an idea.

You still pay CGT on gifts to children; it's only transfers between spouses where there's no CGT. The amount of CGT would be calculated based on market value of the property.

Scuppered already!
Capital gains put us off selling initially.

We can't really move into it as firstly there is a very happy tenant and secondly we live on a farm so wouldn't really be able rent or leave that empty.

Yes, there would be a deemed disposal for CGT at market value - so you would pay CGT as if you had sold it.

You could gift your daughter a share of the flat containing gains up to the amount of your CGT allowance (around £11k of gains can be gifted per annum without tax becoming payable). Repeat every year. This is called 'salami slicing.' The corresponding share of the rent would belong to your daughter. No SDLT if the property is unmortgaged. You would need to seek advice from a lawyer / tax adviser to do the calculations and prepare the documents.

Or it may be better to make gifts of other assets which do not have latent gains (possibly investments although valuations are generally high at the moment) or cash where there is no CGT.

If you hold the flat until death the gains will be wiped out, but you may pay IHT on it at 40% depending on who it passes to and the total value of your estate.

Capital expenditure can be deducted in working out taxable gains. If you bought the flat cheaply (reflecting it's condition) then at least some cost of the rebuilding would likely be deductible. The extent of the CGT may not be as large as you think.

Again, a tax adviser (or accountant specialising in personal tax) would do the sums for you.

Thank you again. Salami slicing is something I had never heard of and could work really well, that's definitely something to bring up.
We purchased the house in 1990 for £25,000 and spent £55,000ish rebuilding, if sold today I imagine it would be for around £240,000 so we would be taxed on the £160,000.

If we Salami sliced around £10,000 a year for ten years to DD would I be right in thinking we should then be taxed on the remaining £60,000?
#learninglots.

It sounds as though, financially this is a good thing to avoid tax. IIWU then I would 100% gift her the property especially since she is your only DC and given her personal circumstances. I would be happy for her to do what she liked with it.

Yes, if you give her shares in the property containing £100k of gain, the remaining gains of £60k would still belong to you, and would remain in your estate for IHT on death.

Are you married? You could gift a half share to your husband (for CGT he would take at your original base cost and no CGT payable) and then you have 2 x annual allowances of gain to transfer more to your daughter every year.

But do check all this with a tax adviser as there are anti avoidance provisions to watch out for if involving a spouse. It should be possible but you might need to wait a year or so after the initial transfer.

Also note that as it is a property the higher rate of CGT (28%) applies.

Hi Poosnu, yes we are married and the house is in joint names so that sounds more promising.

Sorry the house is NOT in joint names.
DH is very impressed at all this info which will be invaluable when seeking professional advice.

If you add her name to the legal deed without severing then she will inherit both of your 'shares' tax free if you are planning on avoiding IHT this way.

So you can ask about transferring a half share to DH as tenants in common, waiting a year or however long is needed to avoid falling foul of anti avoidance rules, then every tax year thereafter each transfer a share to DD - the maximum permitted to trigger only the annual allowance of taxable gain. (£11,300 each in 17/18 so £22,600 of gain per tax year between you).

When adjusting shares, the rent would belong to each of you in those same proportions. It might be possible to agree a different split for profits / losses so the taxation of the rent is on a different basis (whatever is most beneficial) but this is complex and you will need specific advice on it. Deeming rules apply to spouses but there would also be a non spouse involved.

Your adviser must be someone experienced in personal taxation (whether a tax adviser, accountant, lawyer) and you will then need a lawyer to draw up the transfer deeds.

Usual warning that a gift to your DD would place the assets in her name at risk in the event of her bankruptcy or divorce. Once the gift has been made you can't get it back so you need to be comfortable that you have retained enough assets for your lifetime security.

To clarify the PP's advice, IHT cannot be avoided by putting DD on the deeds. This would just mean that on death the property would pass to her automatically (assuming tenants in common) without the need for a will. IHT would be charged as usual like any gift to a non spouse. Putting DD on the deeds in this way during lifetime would be a gift of a 50% share triggering a CGT disposal.

Good luck - it sounds like you have options here.

* (assuming joint tenants) - penultimate paragraph

Couldn't you look at putting it in a trust for the benefit of DD?

A trust would indeed be another option. Again a disposal for CGT but can roll over gains (so the trust takes your original base cost). This would be chargeable gift for IHT but covered by the nil rate band of £325k. You could transfer it all to the trust now.

Trust route is also complex - incurring legal fees on set up and ongoing, need to submit annual tax returns for the trust, with lower allowances for the trust than for individual.

The decision on how to proceed depends on many factors (including personal tax rates, how sensible DD is, your appetite for complexity), so best to have this discussion with an adviser.

For this route, you would ask about transfer all to a discretionary trust, hold over gains, then either retain in trust over the long term (if you have concerns about your daughter) or transfer out to your daughter in the future. Gains could again be held over in that event if your DD and the trustees choose.

There is no need to have a professional actually appointed as trustee, you can ask them for advice as required without naming them. So be wary of your adviser is pushing for them to be named.

Can't you just 'sell' it to her for a tiny fee?
Someone in my stairwell bought a 300k flat off their granny for £500 about 10y ago

I don’t understand the exact details of why but others might know. You can gift the majority of the property keeping a a tiny percentage 5 percent? Then you carry on paying bills etc.

Sale at undervalue doesn't work - as you are relatives (connected parties) market value would be substituted in CGT calcs.