When an individual transfers an investment property, principally four taxes need to be considered:
- 1. Capital Gains Tax (CGT).
- 2. Inheritance Tax (IHT).
- 3. Stamp Duty (SD).
- 4. VAT.
If the transfer is expected to trigger a capital gain, the following are ways to mitigate the CGT liability:
1. If capital losses are expected in the near future, wait to transfer the property until the tax year in which the capital losses crystallise, so as to offset one against the other.
2. Wait to transfer the property until a tax year in which income is low; so as to utilise the 20% band for CGT, instead of paying CGT at 40%.
3. Taper relief means that the longer the asset is owned (up to a maximum of ten years), the less is the chargeable gain, even for non-business assets. So wait to sell.
NB: If the property has been let to an unquoted trading company after 5 April 2000, business asset taper relief should be available. After 5 April 2004, this applies to unincorporated trading businesses as well.
- 4. Utilise annual exemptions. Practically speaking:
· transfer in stages, a bit each year.· transfer a sufficient amount to the spouse to use their AE.
5. Within twelve months before the transfer, and three years after, invest in a qualifying Enterprise Investment Scheme (EIS) or Venture Capital Trust (VCT) investment and make a claim to defer the present CGT liability. However, the CGT liability will crystallise when the EIS or VCT investment is sold.
6. Under certain circumstances, investment in British films or in Enterprise Zone property could create excess capital allowances, which could be offset against the capital gain.
7. If the property has been used in the taxpayers personal trading business or company, or it is let as furnished holiday accommodation, then rollover relief for replacement of business assets may be available.
8. Gift holdover relief may be available when the property: 1) has been used in the donor's business or personal trading company, or 2) is transferred to a discretionary trust (when the settlor retains no interest in the trust). A transfer into a discretionary trust will be a chargeable lifetime transfer that will trigger an immediate IHT liability, unless exemptions like the nil rate band (£275,000 in 2005/6) are available. Under certain circumstances, the trustees and the beneficiary can jointly elect for a similar holdover election, when the property is given absolutely to the beneficiary. This could create an interesting means of transferring a property from A to B, via a discretionary trust , without CGT.
- 9. The transfer of a property into a registered charity for consideration less than or equal to the original cost, will not trigger a capital gain. (While on the subject of registered charities, the transferor will get a deduction from his chargeable income in that tax year, if an individual, or from income and capital gains, if a company, equal to the benefit the charity receives. This benefit is the present market value of the property, less any consideration the charity pays the transferor.)
A transfer from an individual to another individual or to a non-discretionary trust will most likely be a Potentially Exempt Transfer and exempt from IHT if the donor survives seven years. A transfer into a discretionary trust is a chargeable lifetime transfer, as above.
Stamp duty is payable by the transferee, not by the transferor. Furthermore, there is no SD on a gift, i.e. when the consideration is nil, unless the property is mortgaged.
The VAT position on property is very complex. However, putting things in a very simplified way; sales of new commercial buildings and commercial buildings that are less than three years old are standard rated. Otherwise, unless the vendor has exercised his option to charge VAT, all sales of buildings that are more than three years old are exempt.