UK: Tax Complications

Last Updated: 30 July 2019
Article by Hewitsons LLP

I own a flat which I rent out to a tenant. I'd like to give the flat to my son so he can manage the property and benefit from the profits of the tenancy. If I do that, will he end up with a large tax bill?

There are often several tax complications incurred with the transferring of property, and all too often they are not fully explored prior to embarking on a scheme.

Firstly, the gift itself may trigger both capital gains tax (CGT) for you and also inheritance tax (IHT) for your beneficiaries. In giving the gift to your son, because you will be liable for CGT payment, and you should discuss with your accountant or tax advisor as to what the amount of CGT is, when it should be paid and in which financial year. With regard to IHT, should you die within 7 years of making the gift there is potentially an IHT liability. Proper and thorough estate planning should be sought in this area, to avoid liability for this tax.

Your son will be liable for pay as you earn (PAYE) tax as the rental income he receives would need to be declared as income and would be taxed accordingly. Currently, the first £1000 earned through rental income is tax free, but your son must contact HMRC if the income he receives from the rent is between £1000 and £2500 pa. If the income exceeds £2500 your son would likely need to make a self-assessment return with regard to the rental income. Again, there are potentially some reliefs that could be claimed as your son is permitted to make deductions from the income under 'allowable expenses'. These include the day to day costs of running a property, which is what you envisage your son will do. You can get some guidance from the HMRC website, but, as with any tax affairs, it is always best to seek specialist tax advice.

Finally, your son must also consider his potential CGT liability that that he may be liable for. CGT comes into force and is calculated on the disposal of a property. The calculation is based on the difference of the current house value and how much he eventually sells it for. There is some relief in the form of an annual exemption that can be used to swallow some of that value, and if various refurbishment works are carried out to the property, this can also be set against the sum of CGT owed. However you should be aware that a basic rate tax payer will pay CGT at 18% , and a higher-rate payer will pay 28%. This is a serious consideration you should give to your property plan.

Tax planning is a tricky area of law and finance and the financial impact of getting it wrong can be substantial. You should consider consulting with your account or tax advisor to see what the tax implications are for you both, and although it may be a bit costly to do so, these are serious considerations you should take into account when deciding what to do with your property. It is advice that you cannot afford to avoid spending money on

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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