Passing on rental property to children tax-efficiently is one of the most commonly-asked queries that we receive, especially from older landlords. However, capital gains tax applies to such transfers and this can make such transfers unviable – however, there is a simple yet effective method to mitigate this issue, via the use of a trust.
I want to pass on a rental property to my adult child – why can’t I just do that without paying any tax?
A capital ‘disposal’ occurs when a rental property is transferred from parent to adult child. This means that capital gains tax (CGT) is payable on transfer, and the usual calculation of the tax due applies i.e. sale price (in this case market value) less purchase price, less buying and selling costs. This can often be a substantial amount if there has been significant capital growth on the property.
Example: Mr Jones wants to transfer a rental property to his daughter Jill. Mr Jones is a higher rate taxpayer and the property is valued at £250k, and was originally purchased by Mr Jones for £100k. Mr Jones would therefore face a CGT charge of £38.3k (being £150k capital gain less £2k capital costs and after the £11.1k CGT annual exemption). To make matters worse, as there are no sale proceeds – since this is a simple transfer of an asset – there are no funds available to pay the tax due.