Although it is possible to transfer assets between spouses at a value that gives rise to neither a gain nor a loss, giving assets to children or other family members may trigger an unwelcome capital gains tax bill, even if nothing was received in return.
The market value rule
Where assets are disposed of to a connected person, the transfer is deemed to take place at market value, regardless of whether any payment is actually received and if so, how much the payment is for.
The list of connected persons includes:
· spouses and civil partners;
· relatives (siblings, ancestors or lineal descendants);
· spouse or civil partners of relatives;
· relatives or spouses or of civil partners; and
· spouses or civil partners of those relatives.
However, as noted above, the no gain/no loss rule applies to transfer between spouses and civil partner rather than the market value rules.
The following case study illustrates the potential cost of being caught out by the market value rule.
Case study
Adrian has a buy to let property. To help his daughter to get on the property ladder, he decides to make a gift of the property to her. He receives nothing in exchange for the property.
At the time that he gifted the property to his daughter, the house was valued at £300,000.
Adrian purchased the property ten years earlier for £200,000.
As his daughter is a connected person, Adrian is deemed to have disposed of the property for £300,000, giving rise to a chargeable gain of £100,000 (£300,000 – £200,000).
Assuming Adrian is a higher rate taxpayer and has used his annual exempt amount already, this will give rise to a capital gains tax bill of £28,000 (a 28% tax rate). This must be reported to HMRC within 30 days and capital gains tax paid within the same time frame.
Despite not receiving a penny for the property, Adrian must find £28,000 to pay in capital gains tax.
The gift will also be a potentially exempt transfer for IHT purposes.
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Please note that the above is for general information only and does not constitute financial or tax advice. You should not rely on this information to make or refrain from making any decisions. You should always obtain independent professional advice in respect of your own situation.
