Chelsea 0207 228 2020

Knightsbridge 0207 095 0930

Gifting property to family – inheritance / capital gains tax issues

A client who bought a second residence some time ago and gave their daughter 1/4 of the property who then moved in and lived there.  The daugher has just moved out of the second residence and the owners then rented the flat out.  However, as the daughter is now getting divorced she would like to return to the property.

Our clients would like to give their 3/4 ownership to their daughter but wanted to know if the years she lived in it be counted towards the 7 year residence to avoid tax on a gift or will it only start the day their daughter moves back into the second residence?

As the daughter will be the sole person to inherit the first residence and other assets,  our client wanted to know whether the gift of the second residence can be deducted from the amount she would be entitled before paying 40 per cent tax?

We would recommend looking at the capital gains tax implications first.  When our clients purchased the second residence the ownership would have been held as tenants in common.  If our clients choose to give their daughter the other 3/4 of the property adding to her 1/4 ownership then Capital Gains Tax on the gain attributable to that share will be payable.  As our clients have never lived at the flat it means they cannot be entitled to PPR so will have to pay Capital Gains Tax less their annual exempt amount of £12000.

Once their daughter moves back in and if their daugher decides to sell the second residence she will be entitled to claim PPR on her initial share for the time she has lived at the property.  Assuming she continues to live at the property after the remainder has been gifted to her she wll be able to claim PPR on the aditional share she has been gifted when she eventually sells it.

From an inheritence tax view, the gifts of property are a potentially exempt transfer known at a PET.  In order for the PET to be successful and for the amount to be excludeded from the estate for IHT purposes the person making the gift must survive for seven years after receiving the property.  The original 1/4 share given to the daughter over 7 years ago will be exempt from IHT but the future 3/4 share means that it is only exempt from IHT if our clients survive for a further seven years.