It is fourteen times more expensive to buy a house today than it was for the previous generation, and gifting property can often seem like the answer to your children's house buying woes.
But whether you gift a property or are gifted one, you may have to pay up to 28% Capital Gains Tax on the amount that the property has increased in value, depending on your income.
And while many people gift a property in the hopes of saving on Inheritance Tax, there are situations where Inheritance Tax will still be due on gifted property, whether or not you're due for Capital Gains Tax.
In this article, we're going to cover exactly what Capital Gains Tax on gifted property involves, whether you have to pay it in your circumstances, and how to calculate the Capital Gains Tax you have to pay.
If you gift property to someone, you do not have to pay Capital Gains Tax on it if it is your primary residence, but you do have to pay Capital Gains Tax if you are gifting property that you bought as a second home.
If you have been gifted property by someone either before or after they die, you won't have to pay Capital Gains Tax unless you sell the property without having made it your primary home, although you may have to pay inheritance tax in some circumstances.
Gifting property can have several implications for Capital Gains Tax, as well as Inheritance Tax, depending on your situation, so let's examine this in more detail.
What is Capital Gains Tax, and how does it apply to gifted property?
Capital Gains Tax is a tax you pay on the profit (or 'gain') when you sell or dispose of an asset that has increased in value. You will be taxed on the amount of profit you have made, not the total sum of the money you receive.
You may have to pay Capital Gains tax on a property that was sold or gifted to you that you have not made your own home, or if you gift someone a property that is not your own home. If your income is within the Basic Tax Band, you'll pay 18% Capital Gains Tax on your gain. If your income is above the Basic Tax Band, you'll have to pay 28% Capital Gains Tax,
For tax purposes, giving a property as a gift counts as 'disposing of an asset' (just as if you sold it), and the same goes for selling a property you received as a gift.
If you gift or sell property to your spouse or civil partner, you do not have to pay Capital Gains Tax. However, they may have to pay Capital Gains Tax when they sell or otherwise dispose of it.
Do I need to pay Capital Gains Tax when I gift someone property?
You do not need to pay Capital Gains Tax if you gift someone a property that is your primary residence, i.e. you live there and it is your main home. This is because you're entitled to something called Private Residence Relief, where you do not have to pay Capital Gains Tax on your main home. However, there may still be Inheritance Tax on the property, unless you move fully out of the property and survive seven years after the date of gifting it (after this, it 'falls out of your estate', which means there will be no Inheritance Tax due on the property)
However, if you are gifting someone a property that is not your primary home - for example, if you bought a buy-to-let flat and wanted to give it to your son as a gift - you will have to pay Capital Gains Tax on the difference between the price of the flat when you bought it, and the amount it has increased in value.
Sometimes, people consider gifting their property to stop it being used to pay for their care costs when they are old, or unable to care for themselves. Elderly care is very expensive, and you will have to pay for it yourself out of your assets and estate, unless you have less in capital than £23,250. However, this may be regarded as a deprivation of assets by your local authority. If the council think that you deliberately gave away your assets so that you could receive state funded care, they can still take these assets into account when calculating whether you're eligible for care. A local authority can, by law, transfer the property you've gifted back into your name, and then use it to pay for your care costs.
Do I need to pay Capital Gains Tax when property is gifted to me?
If you are gifted a property on someone's death, you will not have to pay Capital Gains Tax when you receive it. However, if you don't make the property your primary residence (own home), and you later sell it, you may have to pay Capital Gains Tax on the difference between its price on the date you were gifted it, and its market value at the time you sell it.
However, if you were gifted a property on someone's death, for example, if your father left his home to you in his will, you may have to pay inheritance tax. Inheritance tax is only payable on assets worth over £325,000 in 2020/21. If you are gifted a property in someone's will which is worth more than this threshold, Inheritance Tax may be due 40% on anything above this amount. Inheritance Tax will usually be taken from the person's estate (all the property and money owned by the person at the time of their death).
Some people hope to escape Inheritance Tax by gifting their property to a family member. For example, your father could gift you his house but continue to live there until death. However, if you were gifted a property which your father continued to use, this is called a 'gift with reservation' and still liable for inheritance tax when he dies. If you do not make the gifted home your own residence, you could also have to pay Capital Gains Tax when you sell the home, on top of the Inheritance Tax due when your father dies.
In order to make the gift of the property exempt from Inheritance Tax and still live there, your father would have to pay you market level rent for seven years. This would, in turn, increase the amount of income tax you'd have to pay if you were receiving an additional, say, £3,000 in income from rent per month, so you would not really make much saving on tax.
Alternatively, your father would have to do what is called a Potentially Exempt Transfer (PET). He would have to move entirely out of the property after he gifted it and gain no use or benefit from it at all, and survive for seven years after the date of the gift. After this seven years, no Inheritance Tax would be due, although if he dies within the seven years, Inheritance Tax is still payable. PETs rules were introduced in 1986, to stop people from avoiding Inheritance Tax, while continuing to use gifted homes until death.
Just like with the donor of the property, you would not have to pay Capital Gains Tax on selling your father's property, if you had made it your primary residence after he gifted it to you.
How much Capital Gains Tax do I have to pay on gifted property?
If you're eligible to pay Capital Gains Tax on either property you gift or property that's gifted to you, you can work out how much to pay with the following steps.
- First, work out your total taxable income. This includes your salary and other sources of income, minus your Personal Allowance (the amount you can earn without being taxed: currently £12,500 a year), and any other tax reliefs you're eligible for.
- Work out your total taxable gains for each asset you own, or your share of an asset if you own it jointly. This is the amount that an asset has increased in value from the time you bought it, or it was gifted to you, to the time you disposed of it. For you, this would be the property and any other other assets you've disposed of that have gained in value.
- Add the gains from each asset (if the property is your only asset this tax year, then just use the gains from this)
- Deduct your tax-free allowance from this total. The Capital Gains tax-free allowance is currently £12,300. Include any other allowable deductions, including any fees you've had pay when you were gifted the property, including any solicitors and surveyors. You can also deduct the cost of any improvement works on the property, for example, an extension. However, ordinary maintenance like painting and decorating doesn't count.
- Add what's left after deducting your tax-free allowance to your taxable income.
- If your taxable income is within the basic Income Tax band, you'll be charged 10% Capital Gains Tax on your gains, or 18% Capital Gains Tax on residential property. If you earn above the basic tax rate, you'll pay 20% on your gains or 28% on residential property. If you have gains from both residential property and other assets, you can use your tax-free allowance (£12,300) against the gains that will be charged at the highest rate (18% or 28%).
Molly was gifted a property worth £200,000 on her mother's death, which she hasn't made her primary home. She sells the property at £230,000, making a gain of £30,000.
Molly is paying £5,000 in estate agent and solicitors fees to sell the house. She inherited the house with no mortgage, so no stamp duty is due.
Molly earns £35,000, within the basic tax band. She is due to pay Capital Gains Tax on the £30,000 gain of the gifted property, which - after deducting the expenses of £5,000 in fees - is £25,000.
As Molly has no other gains or losses this year, she can deduct the £12,300 tax free allowance on the gain, which leaves her with £12,700 to pay Capital Gains Tax on.
As Molly earns within the basic tax band, she will be taxed at 18% of £12,700, which is £2286. So, she has to pay £2286 in Capital Gains Tax.
Of course, if you sell or gift your property at a loss, you won't have to pay Capital Gains Tax.
You might be tempted to sell, for example, your buy-to-let property at a special low price to a family member, rather than gifting it to them outright, in the hopes of reducing a Capital Gains Tax bill. Be very careful!
Even if you sell your property for less than its market value, for tax purposes, your gain will still be counted as the difference between the price you originally bought if for and the market value on the date of gifting it, even if you sold it for less than market value.
So, not only would you not receive the full amount that your property is worth, you will be taxed as though you did. This could leave you at a significant loss.
How do I calculate Capital Gains Tax on a gifted property?
- When you gift a property that's eligible for Capital Gains Tax. Use the price at which you previously bought the property, and compare it to its market value on the date that you gifted it to work out your gain, and the Capital Gains Tax you'll have to pay. Remember that the property is your primary residence, you won't usually have to pay Capital Gains Tax when you gift it.
- When you are gifted a property that's eligible for Capital Gains Tax. You won't have to pay Capital Gains Tax when you receive the property, but you may when you sell it. To work out the Capital Gains Tax on a property that you're selling, calculate its market value when it was gifted to you against how much you sold it for.
If your home has gained in value at the point you gift it, or sell a gifted property, you'll pay 18% Capital Gains Tax on the gain if you're on the Basic Tax Band, or 28% if you're on a higher Tax Band.
Now that we've gone through all the details of whether you have to pay Capital Gains Tax on a gifted property, we hope you've found it a useful read. If you have any questions about Capital Gains Tax on gifted property, you can also call the HMRC helpline on 0300 200 3300.