Can we leave a property to our son tax-free?

My wife and I own a buy-to-let property that we bought in 1999 for £80,000. It’s now worth about £190,000. We’d like to give the house to our son. Could we do this without incurring capital gains tax?

A couple wanting to pass on a property to their son may still have to pay capital gains tax if it has appreciated in value since they bought it. PHOTO: Adobe Stock
A couple wanting to pass on a property to their son may still have to pay capital gains tax if it has appreciated in value since they bought it. PHOTO: Adobe Stock

Jenny says:

I’m afraid the short answer is no, as HMRC treats a gift of property in a very similar way to a sale, so you’ll be taxed as if you had sold it for market value.

Capital gains tax (CGT) is simple in principle: it’s charged on the profit you make when you sell certain assets. But things get more complicated after that, as the rate you’ll pay and the allowances you’re entitled to depend on what you’re selling and how much you make in profit.

In the case of property (excluding your main home – CGT doesn’t apply here), basic-rate taxpayers pay CGT at 18 per cent; higher-rate taxpayers pay 28 per cent.

To calculate your tax bill, you just apply your rate of CGT to the taxable gain. The taxable gain is the difference between what you originally paid and how much you received from the ‘sale’ (around £110,000 in your case), minus allowable expenses.

These expenses can include buying costs, such as solicitors’ fees and stamp duty, and – less relevant to you – selling costs, such as estate agents’ fees and legal expenses. You can also deduct the cost of any improvement works which have increased the final value, such as adding an extension. This doesn’t include maintenance or decorating costs.

Bear in mind that you might pay different rates of CGT on different portions of the gain. For example, if your annual income is £40,270, you’ll pay 18 per cent on the first £10,000 of the gain, taking you up to the higher-rate income tax threshold of £50,270 (different thresholds apply in Scotland). You’ll then pay the higher rate of CGT (28 per cent) on the remainder.

You’ll also need to deduct your annual CGT allowance – the amount you can earn in profits before you start paying tax. This is worth £12,300 per person, so you and your wife will benefit from a total allowance of £24,600 (assuming you haven’t already used some or all of it).

Where CGT is payable on property, there’s a deadline of 30 days from the date of the sale (or transfer in your case) to report and pay the tax.

While HMRC will treat the gifted property as if you had sold it for market value, the good news is that your son won’t have to pay any stamp duty – as long as no money changes hands and it is an outright gift.

Gifting the property to your son and taking the CGT hit now has another potential upside from a tax point of view: it will reduce the value of your estate, and therefore the inheritance tax bill that might be due after you die (assuming your overall estate exceeds the inheritance tax threshold, which stands at £325,000 – or £500,000 if your main home is being inherited by children or grandchildren). The headline rate of inheritance tax is 40 per cent – considerably more than CGT.

If you live for seven years after making a gift it will fall out of your estate altogether and won’t incur any inheritance tax. Until then, it’ll be treated as a ‘potentially exempt transfer.’ So if you die within seven years, it will be treated as part of your estate and be liable for inheritance tax.

If your potentially exempt transfers are higher than the £325,000 inheritance tax allowance, the rate at which tax is charged goes down based on how many years it’s been since the gift was made – a system known as taper relief. If you made a gift six years before your death, for example, the rate would be reduced to 8 per cent.

In reality, most gifts don’t become taxable because the £325,000 inheritance tax allowance is allocated to gifts made within seven years of the giver’s death before the rest of the estate.