Can parents transfer their rental properties to their children while minimizing capital gains and inheritance taxes?
Transferring Buy-to-Let Properties to Children: Navigating Capital Gains Tax and Inheritance Tax
Many parents are considering passing on their buy-to-let properties to their children, but the tax implications can be complex. Here's a guide to navigating Capital Gains Tax (CGT) and Inheritance Tax (IHT) when transferring these properties.
Gifting Properties as Potentially Exempt Transfers (PETs)
If you gift your buy-to-let properties to your children, the transfer is considered a Potentially Exempt Transfer (PET). If you survive for seven years after making the gift, no IHT arises on that value. However, before that, it's treated as a PET, and if you die within seven years, taper relief may reduce the IHT payable.
Utilising Annual Exemptions and Allowances for Gifts
Annual exemptions of £3,000 per tax year and potentially other small-value gift allowances can help reduce IHT.
Careful Use of Transfers to Spouses
Transferring some equity to a spouse before gifting to children can make full use of CGT exemptions and lower rates for each person.
Avoiding Capital Gains Tax
Gifting a property triggers CGT on any gain above the base cost unless transferred between spouses or civil partners. Transferring directly to children may incur CGT on the gain calculated as market value at transfer.
Inheritance Tax Residence Nil Rate Band (RNRB)
The RNRB may increase tax-free thresholds if the main residence is left to direct descendants, but this mainly applies on death, not at transfer.
Considerations for Non-Resident Beneficiaries
Since the son resides in Sweden, he may be a non-resident for UK tax purposes. Non-resident beneficiaries may still be liable for UK IHT on UK property, as UK property is generally subject to UK IHT irrespective of residency. Swedish tax rules will also apply on receipt of property/gifts and future disposals, so double taxation treaties and foreign tax credits should be reviewed.
Transferring Properties to Trust
Transferring properties to a trust can help defer CGT, with the capital gain being 'held over' and the recipient (in this case, the trustees of the trust) eventually paying tax when they sell the asset. However, holdover relief cannot be claimed on transfer out of trust to a non-resident beneficiary.
In summary, transferring buy-to-let properties can be a tax-efficient way to pass on wealth, but it's crucial to consider the tax implications. Professional legal and tax advice from both UK and Swedish experts is essential to tailor the right approach.
- Seeking financial advice is important when considering the potential tax implications of gifting buy-to-let properties to children as part of a personal-finance strategy.
- When transferring buy-to-let properties as Potentially Exempt Transfers (PETs), surviving seven years after the gift ensures no Inheritance Tax (IHT) is payable, although taper relief may reduce IHT if death occurs within that period.
- To minimize IHT, taking advantage of annual exemptions of £3,000 per tax year and other small-value gift allowances can be beneficial in managing personal-finance issues related to inheritance.
- Carefully considering the use of transfers to spouses before gifting to children can optimize Capital Gains Tax (CGT) exemptions and lower rates for each individual involved in the transaction of property finance.
