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Taxation Solutions - Tax services for property lanlords Tax traps when gifting a property
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Trap 1
Gifts are taxed even if no money changes hands. Tax law states you have sold the property at market value so you must pay Capital Gains Tax (CGT) on the ‘deemed’ capital profit even though you have no proceeds. There is a get-out clause for spouses who can transfer property to each other with no CGT arising if they are living together at the time.

A way around this problem is to transfer the property into a discretionary trust set up to benefit the person you want to give the property to, known as the beneficiary. There would normally be a CGT charge at this stage, but you can postpone this tax by signing an election under Taxation Charge Gains Act 1992, section 260. This transfers the profit you have already made on the property into the trust. When the trustees eventually sell the property they pay tax on the increase in value of the property from the date you originally acquired it.

Trap 2
If you occupied the property as your main home the CGT bill can be reduced in proportion to the period you lived there. This relief can also be used when a beneficiary of the discretionary trust lives in the property. However, if you used the section 260 election to postpone the CGT when you transferred the property to the trust, this main residence relief cannot be used.

Trap 3
If you give away a property but continue to use it in some way, the gift may be disregarded for inheritance tax, so you have to pay tax on it when you die although you do not technically own the property. There are other tax issues concerning gifts with reservation so please talk to us about any plans you have to make gifts of valuable assets before you sign the deeds.

The gift of a property into a discretionary trust is subject to an immediate inheritance tax charge calculated at a lifetime rate of 20% on the value of the property in excess of £263,000 (budget increase). So if the property is worth less than £263,000 and no other assets have been gifted into a discretionary trust within the last 7 years, IHT is charged at 0%, and no tax is actually paid.

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