CGT and IHT

Presumably you live with your partner, and terefore I gather that the property in question is not your home, and therefore the CGT issue arises in case you should sell it.

Meaning what? Why shouldn't it matter? Because the rest of the estate is sufficient from which to pay any IHT due? That's small comfort!

Yes, I believe so. The trick, of course, is to make sure that neither of you dies within 7 years of making the gift.

Consider marrying. Seriously, that would wipe out the IHT problems, but would close the route to crystallising capital gains.

Then your share would not attract IHT.

Yes there would. If you sell the property to her, you crystallise a gain. Then, if you want to take the property back, she could sell it back to you. You would then still own it and therefore it would still form part of your IH taxable estate. However, if, as you say, you will leave the property to charity, then it won't be taxed. You'd have to make sure your partner put a similar provision into her will. Otherwise there is a possibility she might die just after buying it from you but before she could sell it back.

I don't see why not.

That would be more difficult.

Yes. If you lend her the money, she will owe it to you. The debt is an asset as far as your estate is concerned, and will be taxed as such.

Probably, but it would be better to send a copy to the taxman, to make it "official".

Actually we don't live together. We each have our own houses. But this is yet another one.

No, merely that, currently, if I die my share of the property goes to charity so she won't see any of it, not will have any IHT liability as a result of it. If I gift my share to her then any IHT liability as a result of the gift will still leave her better off than if I hadn't gifted it to her at all.

My primary concern is to ensure that she cannot become worse off as a result of me trying to crystallize my CGT liability.

I'd hope that would be the case, but ...

Although then it would mean that we couldn't each have a CGT exempt house. And we'd need a huge combined house if her tidiness wasn't going to encroach on my messiness ;-)

But if my share was a gift from her that was originally a gift from me then she could end up having to pay IHT. And, much worse, not have the asset to pay that liability.

But surely then my loan would be a liability on her estate which could be paid off by returning the property to me.

My goal here is to minimize my possible CGT bill in the future. As a result I'm prepared to take some risks - that she dies while owning the property, that she runs off with someone else and decides to sell her share, etc. But I want to make sure that nothing I'm planning can leave her worse off.

Presumably however, I could gift her money out of income that she could then use to pay off the loan. So if currently I'm saving X per month, I could instead gift that to her and then she could immediately return it to me repaying the loan. That way, I suppose, if there was a shortfall when she sold it back to me the debt could be paid off fairly quickly. Also, presumably, if she were to die I could gift any outstanding amount to her estate.

The only significant risk I could see to her is if property prices fell dramatically and I was made bankrupt.

But she would own the property which would have reduced the size of my estate. So the net effect should be zero. (And, presumably, if she wanted to, she could "repay" the loan by returning the property to my estate and then gift the property to charity meaning that she would be in exactly the same position as if she'd never owned it)

Thanks for your help.

Tim.

I think the OP means that if he gifts it to her and dies within 7 years the gift will still be in his estate. So it would make no difference if he held on to it and let her inherit it later - the estate would be the same size. It wouldn't be exactly the same size of course, because the value of the asset would change in the meantime.

Also the OP should consider this:. If he dies owning the house then the capital gain it has made will not be taxed; there is no CGT on assets held at death. It is better for her to inherit the house rather than for him to sell the house (pay CGT) and have her inherit the (remaining)money.

I agree marriage is good idea. But the OP should note that they need to be married at the time of the gift. It's not enough to be married at the time of the death.

Robert

Ah, a loose partnership. Very nice if you can get it. Or do you mean that you only "don't live together" on paper? :-)

So it would.

When you say "she could end up having to pay IHT", do you mean "she" as in "her estate" or as in "your estate"?

If you gift it to her and then she gifts it to you, and then she dies before you do, the house she gifted to you (or its value) would be clawed back into her estate. Assuming you would be the sole beneficiary of her estate, it would become your problem. But you would still have the asset. You could sell this 3rd house to help pay any IHT due. The charity to whom you would have left the house would then lose out, but you could still leave them the rest of the cash from the sale, or indeed your 1st house.

If you gift it to her and then she gifts it to you, and then you die before she does, then the fact that you first gifted it to her means it will still count as part of your estate. Bizarrely, it would appear to count *twice*, once from your gift, and then again because you've had it back again! If you *also* left it to charity, the second part wouldn't count, but the potential embarrassment from the 1st part would still remain.

What you could do is have her wait 7 years after you gift it to her, before she gifts it back to you, and as soon as she gifts it back to you, you could change your will so that the charity only gets the house if you survive for a further 7 years, and that otherwise, i.e. if you die less than 7 years after receiving the return gift, then the charity will only get the residual value of the house after any IHT due on it has been paid. That's still better than nothing for the charity, and I'm assuming there is no special value to the charity in the house itself, and that, were the charity to inherit it, it would sell it off anyway.

Yes, OK, subject to there not being a substantial drop in value in the intervening period.

That seems fine.

Yes, that's fine provided the house value doesn't drop so much that the loan could not be repaid from it.

No that most certainly won't do. The transfer has to be properly conveyenced, stamped and registered, with all duties and fees, as appropriate, paid.

tim

Hmmm. Good point. I'd completely forgotten about stamp duty. I'm pretty sure that this house will be below the 1% stamp duty threshold.

But when I gave her the 1% I didn't have to do any "stamping" or "registering" and I used a solicitor for that so I'd assume that it was done correctly. AIUI, by not having her ownership registered I could theoretically sell the house and then she'd have to sue me for her 1% (and possibly any other damages by not giving her the option to buy out my share first). If it were registered then I wouldn't be able to sell the house without her consent rather than currently I'm not allowed to.

Is there a difference if it's a purchase rather than a gift?

Tim.

No, I don't think that is the case. It would be if the intention were to transfer legal title, but that is not necessarily what is being proposed here. For CGT/IHT purposes, a mere transfer of beneficial interest, *without* a conveyance, ought to suffice.

I'm afraid the we end up with a pantomime script but I don't think it will.

You're not transferring the right to rental income here (which I believe can be transferred as you describe), but the actual value in the property. I fail to see how you can effectively transfer the value for CGT crystallisation purposes, without actually transferring the property.

tim value

I think beneficial interest goes (or can go) beyond the right to benefit from rental income, and can (perhaps even must) include the right to benefit from capital gain.

What I'm not sure about is whether beneficial interest is indivisible or can be split so that the right to income and the right to gain (from the same potentially fractional holding) can be vested in different people.

I suspect it is indivisible, so that when the BI is transferred (be it gifted or sold), without also transferring legal title, it automatically crystallises the transferor's gain (except when the transferee is the transferor's spouse).

The OP refers to lawyer-blessed paperwork when the initial 2% were transferred and it would be up to him to consult this to determine whether a share in the title or merely in the beneficial interest was transferred. I suspect it would be the former if lawyers were involved.

There would have been no stamp duty due at the time because 2% of the value of the property would not have been above the SD threshold. He could give away further small stakes in the property without SD becoming payable until such time as the cumulative value transferred breaches the threshold (under the "sequence of transactions" rules).

I wonder (even if my opinion that right to gain goes with right to income turns out to be mistaken) if the OP could crystallise sufficient gain for his purposes by transferring only such fraction of the value of the property as stops just short of the SD threshold. Further, if subsequent transfers are in the opposite direction, would that reduce the cumulative total?

For example, suppose the house is worth a bit over 2.5 times the lower SD threshold and he transfers 40% of the value of the property, perhaps spread over a few years to maximise use of the annual CGT exemption, thus bringing the cumulative value transferred to just below the SD point. Then she similarly transfers it all back to him. Does that wipe the slate clean or, if he should then transfer another 40% to her, in order to crystallise a further fraction of the gain, would he more or less immediately fall foul of the "series of transactions" rules, or not? :-)

AIUI[1], my partner owns 1% of the property. If it is sold she will get 1% of the proceeds. So she will be liable for any capital gains on that 1%. She also currently gets 100% of the rental income. We wrote to the tax office telling them about this arrangement. There doesn't seem to be a form.

We are tenants in common. I have a deed of trust that assigned the 1% to her.

I'm pretty sure the value of the property will be below the 1% SD threshold even on an optimistic pricing so this isn't a concern

Don't know about the SD but I don't think you can transfer 40% back and forward to use up all the CGT. Certainly if you tried that with shares it would not work.

At best with CGT I'd expect that first time you'd crystallize 40% of the gain, the second time 24% (40% of the remaining 60%) and so on. But I'd expect that you would have to transfer the most recently acquired proportion first. (I'm ignoring the fact that there might also have been a smaller gain on the 40% already transferred)

I'm starting to think that this is all too complicated to save me what will probably only amount to a few thousand pounds of tax at most and quite possibly save me no tax at all (could even cost me if property prices continue going up at the rate they have). If I did plan to sell the property in the future then I already have the possibility of gifting/selling as much as possible to my partner (inside the CGT allowance) in one tax year and then sell it in another. Or if prices do continue going up (which I don't expect) I could reconsider when transferring it in chunks to use up each annual allowance makes sense and I am definitely going to see a tax saving.

Tim.