Beware the capital gains tax connected person rules
Although it is possible to transfer assets between spouses at a value that gives rise to neither a gain nor a loss, giving a property to children or other family members may trigger an unwelcome capital gains tax bill, even if nothing was received it return.
The market value rule
Where assets are disposed of to a connected person, the transfer is deemed to take place at market value, regardless of whether any consideration is actually received and the amount of that consideration.
The list of connected persons includes:
- spouses and civil partners;
- relatives (siblings, ancestors or lineal descendants);
- spouse or civil partners of relatives;
- relatives or spouses or of civil partners; and
- spouses or civil partners of those relatives.
However, as noted above, the no gain/no loss rule applies to transfer between spouses and civil partner rather than the market value rules.
The following case study illustrates the potential cost of being caught out by the market value rule.
Adrian has a buy to let property. To help his daughter to get on the property ladder, he decides to make a gift of the property to her. He receives nothing in exchange for the property.
At the time that he gifted the property to his daughter, the house was valued at £300,000.
Adrian purchased the property ten years earlier for £200,000. Costs of acquisition and disposal are £5,000.
As his daughter is a connected person, Adrian is deemed to have disposed of the property for £300,000, giving rise to a chargeable gain of £95,000 (£300,000 – (£200,000 + £5,000)).
Assuming Adrian is a higher rate taxpayer and has used his annual exempt amount already, this will give rise to a capital gains tax bill of £26,600 (£95,000 @ 28%). This must be reported to HMRC within 30 days and capital gains tax paid within the same time frame.
Despite not receiving a penny for the property, Adrian must find £26,600 to pay in capital gains tax.
The gift will also be a potentially exempt transfer for IHT purposes.
Partner note: TCGA 1992, ss. 17, 286.