You could write a book about the tax implications of transferring property from one person to another, but not too many people would have the time to read it.
It is a good idea to consider every possible tax before signing that lease or transfer form. You should think about not only the possible tax charge that could arise but also the tax-efficiency of the situation following the transfer.
Let us look at it on a tax-by-tax basis:
Capital Gains Tax
This is the tax that springs to most people’s minds when considering disposals of property from one person to another. The biggest and most obvious tax ‘trap’ is that transfers of property at an undervalue, or by way of a gift, can still give rise to CGT. Such transfers are deemed, for tax purposes, to take place at market value. Such transfers are fine though if they are exempt assets, such as property which has been your main residence throughout your period of ownership or business assets on which ‘holdover relief’ has been claimed.
Stamp Duty Land Tax
SDLT is much more of a menace now than it used to be. When stamp duty was at a flat rate of 1%, it was a tax you could almost forget about. The government have recently seen the potential of property as a new source of revenue and are keen to try and modify our behaviour by imposing substantial SDLT charges.
The first thing to note here is that if you have decided to avoid paying CGT on a gift of property by putting it into trust, there is a potential huge downside in the possible incidence of inheritance tax. An individual can only put fully chargeable property (such as a buy-to-let investment property) worth up to £325,000 into trust, over a 7 year period, before the tax charge arises at the lifetime rate of 20%. Sometimes there can be a bit of a numerical ‘balancing act’ between CGT and IHT.
Commercial properties are subject to VAT if they are less than 3 years old. Another thing to consider is if the property has been the subject of an ‘option to tax’. If an ‘option to tax’ property is sold, a VAT charge arises on the amount received for the sale of the commercial property.
Transferring property is a very complicated process and it is important to seek independent financial advice to help weigh up all the pros and cons before taking such a step.