Can parents transfer rental properties to their children to bypass capital gains and inheritance taxes?
In the UK, profits from rental properties are taxed at different rates depending on the income tax bracket. Basic-rate taxpayers pay 18% for gains on rental property, while higher-rate taxpayers pay 28%. As individuals approach retirement and consider passing on their property portfolio to their children, minimising Capital Gains Tax (CGT) and Inheritance Tax (IHT) becomes crucial.
One strategy for reducing IHT liability is gifting the property during one's lifetime and surviving for at least 7 years to avoid IHT on the gift. This strategy leverages the Inheritance Tax Nil Rate Band (£325,000 per person) and the Residence Nil Rate Band (RNRB) if the property qualifies as a residence.
Transferring the property as a potentially exempt transfer (PET) is another option. If the donor lives 7 years after the gift, no IHT arises, but CGT applies based on market value at transfer for the donor. Considering Holdover Relief for CGT may also be beneficial, especially if the buy-to-let property is a business asset or qualifies for holdover relief, deferring the CGT liability to the child.
For larger estates, gifting amounts above nil rate bands combined with planning for surviving spouses can increase the tax-free allowance up to around £650,000 or potentially £2-4 million with business reliefs.
However, when the child lives in Sweden, the situation becomes more complex. Swedish tax residents are generally taxed on their worldwide income and capital gains, so if the child is a Swedish tax resident, they will need to report UK property income or gains to Swedish authorities. Double taxation treaties between the UK and Sweden may reduce double taxation through credits, but the child may have CGT or wealth tax implications in Sweden not present in the UK.
Given these complexities, especially cross-border issues, professional advice from a UK tax specialist and a Swedish tax advisor is essential to structure transfers efficiently, comply with both jurisdictions, and avoid unexpected tax liabilities.
Key Points:
- Inheritance Tax (UK): Gift property >7 years before death; use Nil Rate Bands
- Capital Gains Tax (UK): CGT triggered on gift at market value; holdover relief if qualified
- Income Tax (UK): Rental income reported by child; non-resident landlord rules apply if abroad
- Child living in Sweden: Report income/gains in Sweden; consider double taxation treaty
- Professional advice: Crucial for UK and Sweden tax compliance and planning
This approach addresses avoiding or minimising UK CGT and IHT while considering the implications for a child residing in Sweden. Transferring rental flats to children can be tax-efficient but has tax considerations like CGT and IHT. It is essential to seek professional advice to navigate these complexities effectively.
- In addition to planning for the UK's Inheritance Tax and Capital Gains Tax, it is crucial to consider the implications for a child who resides in Sweden, as they may have CGT or wealth tax implications in Sweden not present in the UK.
- When giving rental properties to children in the UK, it is important to remember that Capital Gains Tax (CGT) is triggered on the gift at market value, but Holdover Relief can potentially defer the CGT liability to the child if the property qualifies.
- To efficiently structure transfers and comply with both the UK and Swedish tax jurisdictions, it is essential to seek professional advice from a UK tax specialist and a Swedish tax advisor.
- By seeking professional financial advice, individuals can navigate the complexities of transferring rental properties to children, minimising UK Capital Gains Tax and Inheritance Tax, and ensuring compliance with both the UK and Swedish tax systems.
