Should I gift my property to my company?
25th August 2023
Posted in Articles, Capital Gains Tax, IHT, Inheritance Tax, Trusts and Estates, Private Client, Property Tax, Stamp Duty Land Tax by Tom Minnikin
We were having a debate in the office this week about what is the costliest mistake that anyone had come across someone making in tax. There are ones which come to mind involving pension schemes, where taking ‘unauthorised’ steps can result in hefty tax charges (55% and above). However, these are quite technical. Plus you would also hope that most people know to take professional advice when it comes to pensions.
As the conversation went on, many of the examples seemed to involve a common theme – individuals making gifts. The main reason for this centred around capital gains tax. If you were to ask the ordinary man in the street whether he would be liable to tax on giving away an asset to another family member, say a rental property, I would bet a high percentage would say no, on the basis that there is no consideration being given. However, this is incorrect. If the recipient is a connected person, then s.18 TCGA 1992 treats it to be a market value disposal. Even if the parties are not connected, s.17 TCGA 1992 can apply to deem the disposal to be at market value as a non-arm’s length transaction.
Can it get worse than this?
This is when we got into the realm of gifts to companies. Here the tax implications can be much worse. Take the example of Kevin. He owns a buy-to-let property worth £800,000 which he bought 20 years ago for £250,000. He decides to gift it to his company after hearing in the pub that this is a good way of mitigating the restriction on mortgage interest relief that applies to higher and additional rate taxpayers. His friends tell him this is perfectly legitimate, and as it is a gift there are no tax implications. Kevin is in for a nasty surprise.
Firstly, the market value rule for capital gains tax purposes applies here, either because Kevin is connected to the company, or because the transaction is not at arms’ length. This triggers a £550,000 gain on which 28% tax is payable – and within 60 days!
Secondly, even though there is no consideration given, transfers to connected companies have SDLT implications.
In this example, there was a mortgage of £200,000 on the property. Kevin remembered that the assumption of a mortgage counts as consideration for SDLT purposes, but he thought that because it was below the 0% threshold there would be no SDLT to pay. This is wrong for two reasons:
- Companies are subject to a 3% surcharge on acquisitions of residential property; and
- Notwithstanding the above, acquisitions of properties by connected companies are treated as taking place at market value for SDLT purposes.
Kevin has in fact triggered an SDLT liability of £51,500!
Deeper and deeper
Things get can even worse if the Annual Tax on Enveloped Dwellings (‘ATED’) rules apply. Under these rules the rate of SDLT becomes 15%. Plus there is an additional 2% if the acquirer is non-UK resident. ATED applies to acquisitions of residential properties worth more than £500,000, although there is an exemption available for properties that are acquired exclusively for the purpose of a lettings business. Kevin can breathe a small sigh of relief here.
Finally, it is often overlooked that gifts to companies are chargeable lifetime transfers for inheritance tax (‘IHT’) purposes. If there is a transfer of value, then an immediate 20% IHT charge will be triggered.
Whilst in the case of an individual transferring a property to their own company there should be no transfer of value (because the disposal of the property is reflected in an increase in the value of the shares), you can easily think of cases where traps may be fallen into. For example, if Kevin and his friend, who owns a property of the same value, decided to gift them into a company that they own 50/50, there would be an IHT charge arising from the fact that the value of each 50% shareholding would have to be discounted for the lack of control. Likewise, if Kevin gives the property to his children’s company, an IHT charge would arise.
Forbes Dawson view
I expect there are probably worse mistakes out there, but this example does illustrate why it pays to take advice.
There may be some scenarios where transferring a property to a company is justified, e.g. where a person moving from a property of low value to one of high value needs to dispose of the old one to avoid the 3% second home surcharge. However, even in this case we would probably suggest a sale rather than a gift to avoid IHT issues and allow the proceeds to be extracted from the company.
