When you gift a property, whether to a family member or someone else, it’s important to understand the tax implications. In the UK, property gifts are not as straightforward as they seem, and Capital Gains Tax (CGT) may still apply. This guide will help you understand when CGT is due on gifted property and how to navigate the process.

What Is Capital Gains Tax?

Capital Gains Tax is a tax on the profit you make when you sell, dispose of, or transfer an asset. If the asset is a property and you gift it rather than sell it, the process still triggers a disposal event, which means you may need to pay CGT if there has been an increase in the property’s value from the time you acquired it to the time you gave it away.

This applies to properties that are not your primary residence. If you’re gifting your main home, you are usually exempt from CGT due to Private Residence Relief.

Does Gifting Property Trigger Capital Gains Tax?

Yes, in most cases, gifting a property triggers Capital Gains Tax. Even though no money is changing hands, HMRC still considers it a disposal for CGT purposes. Here’s how it works:

• The person gifting the property is treated as though they sold it at market value, regardless of whether any money was exchanged.
• If the property has increased in value since the time it was acquired, the person gifting it may need to pay CGT on the difference between its original purchase price and its current market value.

Example:

If you bought a property for £150,000 and it’s now worth £250,000, gifting the property would be considered a disposal at £250,000. The capital gain of £100,000 (£250,000 – £150,000) would be subject to Capital Gains Tax, minus any available allowances or reliefs.

When Is Capital Gains Tax Not Payable?

There are certain scenarios where CGT may not be payable, or where exemptions apply:

1. Gifting to a Spouse or Civil Partner

When you gift property to your spouse or civil partner, you won’t need to pay Capital Gains Tax. This is because transfers between spouses or civil partners are exempt from CGT.

However, this exemption does not apply if you are separated or divorced at the time of the gift.

2. Private Residence Relief

If the property you’re gifting is your main home, you may be eligible for Private Residence Relief, which exempts you from CGT on the sale or disposal of your primary residence.

To qualify for this relief, you must have lived in the property as your main home for the entire period you’ve owned it, or at least for a significant portion of that time.

3. Annual CGT Exemption

Each individual in the UK is entitled to an annual exempt amount for Capital Gains Tax. For the 2023-2024 tax year, the annual exempt amount is £6,000. This means you can make gains of up to £6,000 in a tax year without paying any CGT.

If your capital gain from gifting the property is less than this amount, you won’t need to pay CGT.

4. Business Asset Disposal Relief

If the property you are gifting is part of a business, such as a buy-to-let portfolio or commercial property, you may be eligible for Business Asset Disposal Relief. This allows you to pay a reduced rate of CGT of 10% on qualifying business assets.

How to Calculate Capital Gains Tax on Gifted Property

When calculating CGT on gifted property, you’ll need to determine the gain by comparing the market value of the property at the time of the gift with the price you originally paid for it.

Steps to Calculate CGT:

1. Determine Market Value: Estimate the market value of the property at the time you’re gifting it. You may need to hire a professional valuer to ensure accuracy.
2. Subtract the Original Purchase Price: Subtract the amount you paid for the property when you originally bought it from the current market value.
3. Deduct Allowable Expenses: Deduct any allowable expenses, such as legal fees, estate agent fees, and the cost of any improvements you’ve made to the property.
4. Apply the Annual Exemption: Apply the annual exempt amount (currently £6,000) to reduce your taxable gain.
5. Calculate CGT: The remaining gain is subject to Capital Gains Tax. The rate depends on your income:
   • 18% for basic rate taxpayers on residential property
   • 28% for higher or additional rate taxpayers on residential property

For non-residential property or other assets, the rates are 10% for basic rate taxpayers and 20% for higher rate taxpayers.

Reporting and Paying Capital Gains Tax

If CGT is due on the property you’ve gifted, you must report the gain and pay the tax. Here’s how:

1. Use the CGT on UK Property Service: You’ll need to report the gain using HMRC’s online CGT on UK property service. The sale or gift must be reported within 60 days of completion.
2. File a Self-Assessment Return: If you’re already registered for Self Assessment, you’ll also need to report the gain on your annual tax return.
3. Pay the Tax: You’ll need to pay any Capital Gains Tax within 60 days of the disposal.

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Failure to report or pay CGT on time can result in penalties and interest charges from HMRC.

Inheritance Tax Implications of Gifting Property

In addition to Capital Gains Tax, gifting property may also have Inheritance Tax (IHT) implications. If you gift a property and continue to live in it rent-free or retain any interest in it, HMRC may still consider the property part of your estate for Inheritance Tax purposes.

Even if you gift the property entirely, it could still be subject to IHT if you pass away within seven years of making the gift. This is known as the seven-year rule.

If you survive for seven years after gifting the property, it will not be subject to Inheritance Tax.

How CANGAF Accountants Can Help

Navigating the complexities of Capital Gains Tax and Inheritance Tax on property gifts can be challenging. At CANGAF Accountants, we specialize in providing clear, comprehensive advice to help you manage your tax obligations.

Our team can assist you with:

• Calculating any Capital Gains Tax liability on gifted property
• Advising on available reliefs and exemptions
• Ensuring compliance with HMRC reporting requirements
• Planning for Inheritance Tax implications

We can help you make informed decisions about gifting property, ensuring that you minimize any tax liability while staying compliant with UK tax regulations.

Conclusion

While gifting a property may seem like a simple and generous gesture, it can have significant tax implications. In most cases, gifting a property will trigger Capital Gains Tax, and you must report the disposal to HMRC within 60 days. However, there are exemptions and reliefs available, such as transfers between spouses or civil partners and Private Residence Relief.

To ensure that you meet your tax obligations and reduce any potential liabilities, it’s essential to seek professional advice. CANGAF Accountants is here to guide you through the process, offering expert advice and support.

Contact CANGAF Accountants

• Address: 235 Tonge Moor Road, Bolton BL2 2HR
• Email: info@cangafltd.com
• Phone: 01204 859315