Editor's note: This brief was summarised by The Property AI Team from a report by Property118. Read the original article for full details.
Gifting a Rental Property Can Trigger a Tax Bill Approaching 64%
Giving a rental property to the children can trigger capital gains tax and still leave an inheritance tax bill if the donor dies within seven years, according to a Property118 report by Mark Alexander. CGT and inheritance tax have different rules, so a gift can bring the first tax into charge immediately while failing to remove the second.
Why a gift can create a tax bill without cash
When an investment property is given to an adult child, the normal capital gains tax calculation uses its market value at the date of the gift. Receiving no money does not prevent a taxable disposal. Broadly, the gain is that value less the allowable acquisition cost, qualifying improvements and other permitted costs. The higher CGT rate is currently 24%, the report states.
An ordinary buy-to-let investment gifted outright to a child does not generally qualify for business asset gift hold-over relief, which defers a gain. There are reliefs for particular circumstances, but being a landlord is not, by itself, enough.
How the combined bill can approach 64%
The report sets out a hypothetical mortgage-free rental property worth £1 million, with an allowable CGT cost of £50,000. It assumes the donor has used their CGT annual exemption, has no available losses or other reliefs, pays CGT at 24% and bears that tax personally from other funds. Earlier gifts have already exhausted all available inheritance tax nil-rate band and gift exemptions. The landlord gives the property outright to a child, retains no benefit and dies two years later, with its value unchanged and no other relevant reliefs.
On those assumptions, the capital gain is £950,000, CGT is £228,000 at 24%, and inheritance tax is £400,000 at 40% of the £1,000,000 gift. The combined taxes associated with the gift total £628,000, or 62.8% of the property's value in the example.
The report explains that as the allowable cost becomes smaller relative to the property's value, the combined figure approaches 64%. CGT applies to the gain, while inheritance tax applies to the taxable value of the gift, so this is not a flat 64% charge on every property gift.
Different people, different liabilities
The report notes these are bills falling on different people. The donor normally pays CGT; the recipient is normally primarily liable for inheritance tax on a taxable failed gift. A property received without cash can therefore leave the child needing to fund a substantial liability.
The calculation needs to cover the whole family estate. Paying CGT from the donor's other funds can reduce the estate remaining at death. If the recipient bears the CGT, a specific deduction can reduce the gift's inheritance tax value. The £628,000 is a gross total of the two bills in the example, rather than a calculation of the additional cost compared with keeping the property.
The seven-year rule
An outright gift to a child is usually a potentially exempt transfer. Death within seven years can make it chargeable, but does not automatically create a 40% bill on the entire gift. Earlier gifts and available allowances matter.
Source: Property118