For most individuals their residence is their main asset. Where transactions in connection with the property are undertaken without professional advice the tax costs can be unexpected and in many cases the costs could have been avoided with the right advice.
The government introduced the residence nil rate band in April 2017. By April 2020, the residence nil rate band will increase to £175,000. The basic nil rate band together with the residence nil rate band will allow an individual to pass their home up to the value of £500,000 to their descendants before there is a charge to Inheritance tax.
For Inheritance tax purposes, if someone transfers their property without any strings attached and lives for seven years from making the gift, there would be no Inheritance tax payable on the transfer.
Let’s look at an example- Joan had lived in her property for many years. In 2011 she gifted the property to her adult children but Joan continued to live at the property. At the time of the gift the property was worth £500,000 but Joan did not have a capital gains tax charge as principal private residence relief was available. Joan thought that there would be no inheritance tax (‘IHT’) payable on her death as she no longer owned the property.
Joan died in 2018 and at the date of her death the property was worth £700,000. The property was taxable in her estate as it was a gift with reservation. Depending on the nil rate band and the residence nil rate band available, there could be an IHT charge.
For her children the base cost of the property was £500,000. Had Joan not gifted the property the IHT position would still be the same but at least her children would have the benefit of the higher base cost of £700,000. The mistake could cost £50,000 in additional tax on the future sale of the property.
Where an individual gifts their property but continues to reside in it, the transfer is seen as never have happened for Inheritance Tax purposes. The arrangements need to be structured so that the asset will fall outside their estate. Remember, if structured correctly the gift would be a potentially exempt transfer should the individual survive seven years from the date of the gift to completely avoid IHT.
Another tax to consider when selling or gifting a property is Capital Gains tax.
If the individual instead sells their residence in their lifetime, there could be exemption from Capital Gains Tax if the property has been their principal private residence throughout its ownership. This is a valuable relief and can save thousands of pounds in tax.
For those selling a residential property that they have not always lived in, there could be a Capital Gains Tax liability. From April 2020, the tax charge would need to be paid with 30 days of the sale.
Where a property is gifted but is subject to Capital Gains Tax charge, the same 30-day deadline will apply.
With property transactions planning is important to minimize the tax exposure. After all, every parent wants to transfer the family home to the children, tax free.
For planning advice and a no obligation quote, contact Zahra Bharmal at Gabelle on 0845 4900 509.