Landlords considering gifting an investment property to their children could face a combined tax bill approaching 64% of the property's value, according to analysis published today. The process can trigger capital gains tax (CGT) at the time of the gift and may still lead to an inheritance tax (IHT) liability if the donor dies within seven years.
When an investment property is gifted to an adult child, capital gains tax is typically calculated based on its market value at the date of the gift. The higher CGT rate is currently 24%, and ordinary buy-to-let investments generally do not qualify for business asset gift hold-over relief.
A hypothetical example of a £1 million mortgage-free rental property with an allowable CGT cost of £50,000, where the donor has exhausted exemptions and dies two years after gifting it, could result in a combined tax bill of 62.8% of the property's value. This figure approaches 64% as the allowable cost decreases relative to the property's value. The CGT is usually paid by the donor, while the recipient is typically liable for IHT on a taxable failed gift.
For married couples, transferring an asset with a significant unrealised gain to a terminally ill spouse can produce a different result. Under inter-spouse CGT rules, such a transfer can occur at no gain and no loss, with the recipient taking over the original tax cost. If the asset is then left back to the surviving spouse via a will, it acquires its date-of-death market value as its new CGT cost, and the spouse exemption can cover both transfers for IHT.