Tax on Gifted Land?

[aims]

Hi All,

I’m currently looking to have some land (garden) gifted to me by my father from his current primary residence. I’ve been advised there are some tax considerations especially as i’m deciding whether to complete the transfer of land before or after I obtain planning permission for it. I am looking to get professional tax advice but wanted to get opinions before-hand. The three taxes i’m aware of are:

• Capital Gains Tax – I imagine this applies because the land is no longer part of the primary residence once it is split and gifted. However my father is retired, so I’m not sure what % bracket for CGT he will fall in.
• Inheritance Tax – Shouldn’t apply to me if my father survives more than seven years after the gift
• Stamp Duty – shouldn’t apply to me as house is free from mortgage

 

Questions:

1. Would my father have to pay CGT based on the information above?
2. If we eligible for gift relief and I want to sell the new-build property, will I pay CGT even if it has then become my primary residence? The CGT on the gain (once I build a house) will be enormous as the land with a property on it will value considerably more.
3. If I transfer the land pre-planning (lower value = less CGT), then find out I can’t get planning permission and want to transfer the land back, are there any tax implications to me/father? The land in theory goes back into his primary residence.
4. How does HMRC view ‘value’ of land and the gain? i.e. originally my father paid 80k for the whole property but the gifted land is only the garden portion of the property and may be worth around the 50-90k now on its own.
5. HMRC requires valuation from a professional surveyor only?
6. When dealing with the splitting and transfer of land, should a solicitor deal with HMRC for tax? Or will this need to be a separate process my father and I will need to do ourselves?

 

Many thanks for any help you provide!

[Oz07]

Not advice to rely on but I've found a lot of our tax system - outside of the realms of paye rely on honesty and compliance from the persons involved. I'm not encouraging avoidance btw. I've transferred land before though and have used values which were reasonable on sdlt. No one has ever checked these figures but obviously they could. The point im getting at is be wary of paying for professional valuations. Aslong as you don't take the piss it would likely never be checked. 

[Ferdinand]

@aims 

This is my opinion not advice.

 

Answers first:

 

Stamp Duty is nothing to do with the mortgage. It is on the value of sold Land and Buildings, with a special rate of +3% which applies unless it is eg your main residence or in other exempt categories. However, this has a threshold of 40k which you may be under depending on what you do.

 

I think CGT should probably not apply to gifts. I am not clear what happens if you dad dies before 7 years without asking my accountant.

 

CGT is paid on the increase in value of an asset while you hold it. You get an allowance (11k?) each year, and you may be surprised how small the liability may be; it was on mine last time. For a start it is part of an asset not the whole you are dealing with, and extra pieces of garden are not necessarily worth as much as we might think. Then if you build something I think you can offset costs against the gain, and if you did the usual self-build spend-up-to-the-final-value thing, there would be no immediate gain anyway to pay CGT on .

 

And comments

 

The advantage of a valuation is that it allows you to justify your decision to the HMRC just in case someone asks. It is a cheap insurance policy. There is always some variation in values, even amongst 50 identical houses. For a potential plot, if you reduce the risk by eg consulting with the Council pre-app service and getting a "probably yes", or any other amount of things, that alone may increase the value.

 

I think you may need an accountant as well as a solicitor - or talk to a place that has both. Once you procure a solicitor, ask the solicitor whether you need an accountant (or vice versa). IMO it is wise to use a solicitor to do land transfers if you do not do it regularly yourself - but use them to learn the process and check all the details. Any professional should give you enough time to ask some questions (write them down first) as to whether you need their services.

 

I would start by sitting down with the experienced person (ideally MRICS) at the closest independent EA and talking about options. Lead with what the plot with PP or a house would be worth and ask enough supplementaries to understand your options, then ask for a recommendation for a solicitor if you need one. The karma quid pro quo is that you give them a shot at selling it later should you proceed.

 

I think you need to be clear about your objectives - is the aim (1) for your dad to give you some money by utilising his spare garden (2) for you to build a house to live in or (3) for you to get the experience of doing a project.

 

If (1) it is possible that there will be no extra gain by building a house. Occam's Razor perhaps says you get the PP for your dad, he sells the plot and gives you the money. Then lives for 7 years.

 

If (2) you need to find out about things like moving in with dad first (extension? Good way to gain experience), then building it in your main residence garden.

 

If (3) - fair enough, but do not necessarily expect to get that much extra money in the short term over selling the bare plot as well as learning.

 

The biggest advantage of building a house I can see is that you have a larger sum that will tick up in value each year you keep it. 25% over 5 years on 500k is a lot more in cash terms than on a 150k plot.

 

If you are in West London more intensive developments may be possible. Long term rental or similar investment for decades? I am aware of people who moved out of a nice area 25 years ago for a similarly priced premium house elsewhere and the London house is now worth 4 or 5 times the other one.

 

Ferdinand

 

Edited April 24, 2017 by Ferdinand
The bloke does not live where his avatar implies !

[AliG]

I am not tax expert, this is just from my reading of the rules. Assuming that you go to a lawyer for the transfer they will likely give you better advice.

 

1. Assuming that your dad's garden has been in continuous use as his garden, the house is his primary residence and his house sits on less than 0.5 hectares then the garden transfer would be exempt from CGT.

 

2. If you move into the house and it becomes your main property then it will become exempt from CGT. However, there is no hard and fast rule about how long you would have to live there for. This seems to be somewhat of a grey area. If you owned another house and moved out then back in for example it is unlikely it would be considered that it was really your main residence.

 

3. If land is transferred to you then back it is unlikely there will be any tax due as the value would be the same or indeed less, if it is now definite that it cannot get planning permission. To qualify for principle residence CGT relief the garden would have to be brought back into use as part of the house's garden.

 

4. I didn't know this, but as far as I can see if property is transferred as a gift and there is no mortgage on the property then there is no stamp duty payable.

 

If it is a gift the value is 0 so if it was developed and sold there would be more CGT to pay. Indeed if the plan was to develop and sell it I would guess that you would be better off buying it from your dad as this would reduce CGT liability.

 

5. If a valuation was necessary in any situation then it would just have to be reasonable and justifiable, it would not have to be a professional surveyor. The onus is on the buyer to register the correct market value if necessary.

 

6. Normally the solicitor files any necessary stamp duty, although they should confirm it isn't necessary if it is a gift.

 

7. Morbid, but If your dad was to die within 7 years of the transfer it might be necessary to go back and value the "gift"

 

My reading is that if you plan to live in the house as your main residence then the land can be transferred as a gift and all should be fine.

 

If you plan to develop it and sell it, it would probably be better to either sell you the land or indeed just sell the land to a developer.

 

[Temp]

Your fathers PPR should be exempt from CGT but it's not enough for the gifted land to be part of the same title plan as his house, it must be garden or similar. I think the words the HMRC use are "land required for the enjoyment of the dwelling"..

http://www.wrightvigar.co.uk/tax-implications-sale-garden/

 

You should not fence off the part he is giving you until after the transfer..

 https://www.taxation.co.uk/Articles/2014/02/26/321001/gardening-gains

..fencing off the part which has been earmarked for the developer before the date of the disposal could jeopardise the availability of OMR (only or main residence relief) and would not, therefore, be recommended. It is also good practice, where there is a potential issue over the use or size of the land, to maintain photographic evidence of the use of the grounds as a garden.

 

I don't think it's necessary to transfer the land to you before getting Planning Permission. It used to be the case that getting Planning Permission was classed as developing the land making it liable for CGT but I think the rules were changed some time ago...

 

https://www.homebuilding.co.uk/how-to-build-a-new-home-on-a-garden-plot/

 

If you obtain planning permission to build a new home in the garden of your existing home, your

Principal Private Residence (PPR), and then decide not to build but sell off the plot instead, then, as long as the plot does not exceed 0.6 hectare (approximately 1.25 acres) in size, the gains from any sale are exempt from Capital Gains Tax (CGT).

 

If you sell the house soon after moving in the HMRC may look back an any paper trail to see what your intentions were. So any loan you take out should be a regular or self build mortgage not a short term business loan or similar that would give away intentions. The VAT reclaim scheme is also only for people building their own home to live in and some types of warranty are only open to self builders not developers. None of this is a problem if you plan to build a house to live in but needs to be considered if you are building for sale or rent.

 

If you build the house but decide to let it out then CGT will be payable on any subsequent sale due to the "first supply is a letting rule".

 

I hate to mention it but... If your father were to declare bankruptcy  within 5 years then the official receiver can reverse the transfer if he believes the gift was made to secure an asset from his creditors.