How can I transfer to my children and avoid CGT?

Question We have a second home, which we rent out. We have owned it for 3 years and purchased it for £54000. It is in joint ownership between my wife and I.

Current Value is approx £130000-£140000!

It is our intention of either transferring to our 2 children (20 & 24 years old) or sell to them. Which is the most tax efficient way in which this can be done and when is the best time as we are in no hurry i.e.: not paying any CGT at all? Assume that property has not been PPR at any point.

Arthur Says:

Since the property has never been a ‘Principle Private Residence’ (PPR) at any point, it is purely an investment property.

As such the only reliefs available to the owners on a gain when it is disposed of are taper relief and annual exemption (AE).

If it is given to children, it is deemed to be transferred to them at present market value, whether they actually pay this cash to the parents or whether they pay nothing. This therefore means that the parents will be taxed on a gain of £130K-£140K less £54K, less taper relief and AE as above.

It may be an idea to continue to own the property for longer, in order to be eligible for more taper relief, but then there is the distinct likelihood that the market value of the property will rise.

If you do hold it for a longer period then you could gift the property in stages, using your annual CGT exemption. By using this strategy, you could effectively gift £17,000 of the gain to your children free of tax on an annual basis. Off course this would mean that you would need to gift for several years and would not be able to use your annual CGT allowance elsewhere during this period.

Alternatively, consideration could be given to legitimately making it your PPR, as this will help to wipe-out a large chunk of your CGT liability.