Transferring Ownership of Property

We are frequently asked to advise on the tax implications of transferring property between individuals and of incorporating a property business. Whilst the specific details of each transaction will always need to be considered, the following provides an outline of the basic tax treatment.

Transfers Between Individuals

Capital Gains Tax

A transfer of ownership is always a chargeable disposal for Capital Gains Tax purposes, except when ownership passes on death under the terms of a Will.

Whether made by sale or gift, the gain arising is calculated in the same way, with the only difference being the disposal value. On a sale this value is the proceeds received, but a gift is treated as made at market value at the date of transfer.

There is however an exemption from Capital Gains Tax where a property (or an interest in a property) is gifted to a spouse. Transfers between spouses are made on a ‘no gain / no loss’ basis, which means the receiving spouse is treated as if they acquired the property at the same date and for the same price as the gifting spouse had originally. For transfers made after 6th April 2020, the receiving spouse also inherits the Private Residence Relief period.

Inheritance Tax

When a property is sold its value is initially removed from the vendor’s Estate and is immediately replaced by the cash proceeds of the sale, so there is no transfer of value for Inheritance Tax purposes.

If a property is gifted no payment is received in return and the value of the vendor’s Estate is reduced. The transfer is therefore caught by the Inheritance Tax rules. The gift is a Potentially Exempt Transfer and there is no charge to tax immediately or on death, provided the person making the gift survives for 7 years from the date of transfer. If death does occur within 7 years, tax will be due and is calculated with reference to the Nil Rate Bands available at the date of the gift and the tax rates applicable under the tapering rules.

Again, as for Capital Gains Tax, gifts between spouses are exempt from Inheritance Tax so have no impact on the Nil Rate Band or Residence Nil Rate Band available for the Estate of the gifting spouse.

Stamp Duty Land Tax

A property is usually sold for cash ‘consideration’ and Stamp Duty Land Tax is charged to the purchaser on the amount of that consideration exceeding the 0% threshold (currently £250,000).

When a share in a property is gifted, there is no cash consideration on which tax can be charged. If, however there is an outstanding debt secured on the property, the recipient of the gift is deemed to assume responsibility for a share of that debt equal to the share of the property interest they acquire. This value is treated as consideration on which Stamp Duty Land Tax will be paid, to the extent that it exceeds the 0% threshold.

In contrast to the position for Capital Gains Tax and Inheritance Tax, there is no exemption for inter-spouse transfers; a gift from one spouse to another may still result in a tax liability if the property in question is mortgaged.

Other Points to Note

It is quite commonplace for individuals who own interests in property, whether jointly or on their own, to assign part or all of their right to income and gains to another person via a Declaration of Trust. The assignment of these rights is a transfer of the beneficial interest in the property and, even though legal ownership is undisturbed, it is the beneficial ownership that determines the tax treatment. For this reason, the assignment of rights is charged to Capital Gains tax, Inheritance Tax and Stamp Duty Land Tax, in the same way as an actual transfer of ownership between the two parties.

Transfer To a Company – Individuals

Chargeable Gains

The position is the same when a property is transferred to or from a company; the disposal is a chargeable event, and any gain arising is subject to either Capital Gains Tax or Corporation Tax as appropriate. Taxable gains are calculated in the same way, although a company can still benefit from Indexation Allowance.

Relief from Capital Gains Tax may be available where an individual incorporates a property business. Incorporation Relief allows the capital gain on transfer of a property in exchange for shares, to be deferred until the subsequent sale of those shares. This is achieved by reducing the base cost of the shares by the gain held over.

Inheritance Tax

A transfer of property to a company in exchange for shares is not a transfer of value for Inheritance Tax purposes, because the value of the property leaving the individual’s Estate is replaced by the value of the shares received. If the transfer is made as a true gift with nothing received in return, there is a Chargeable Lifetime Transfer of value which will attract an immediate charge to tax.

Stamp Duty Land Tax

Stamp Duty Land Tax is charged on the consideration received for any transfer of property to or from a company unless it is a genuine gift. However, in most cases the transferor is connected with the company and there are special rules to prevent avoidance of Stamp Duty Land Tax in these circumstances.

When the transferor is connected to the company, there is a charge based on the market value of the property, regardless of what the company pays for it. The same applies even if no money changes hands or the transferor receives shares in the company instead. In both cases the charge is made with reference to the normal Stamp Duty Land Tax thresholds.

Transfer To a Company – Partnerships

Chargeable Gains

As a partnership is transparent for tax purposes, the disposal of any property used in a partnership business is a disposal by the individual partners of their respective share in the property. Any gains arising are charged to tax in accordance with the normal rules for Capital Gains.

Incorporation Relief may still be available, but again this relies on there being a genuine partnership business.

Inheritance Tax

Again, because the partnership itself is ignored for tax purposes, the treatment is the same as for an individual. There will be no transfer of value for Inheritance Tax provided the shareholdings in the company mirror the shares each partner held in the partnership. Where this is not the case, transfers of value will arise for any partner who receives a shareholding that carries a lower value than their previous partnership share.

Stamp Duty Land Tax

Stamp Duty Land Tax will apply as normal to the transfer of property from a partnership to a company. However, there are special provisions for calculating the consideration in this situation which are known as the Sum of Lower Proportions rules. The calculation identifies as a percentage, the additional chargeable interest acquired by each partner once they have become shareholders of the company and that proportion of the property value will be treated as consideration. If each partner is entitled to the same share of the property both before and after the transfer, none of them will have acquired an additional interest and there will be no chargeable consideration. So, provided the shareholding received mirrors the partnership share prior to transfer, there will be no Stamp Duty Land Tax charge.

Other Points to Note

Incorporation Relief will only be available when the entire business and all of its assets are transferred to the company. The rental activity must also amount to a ‘business’ rather than just the letting of property. This principle was established by the case of Ramsay v HMRC and, whilst there are various factors to consider, if the taxpayer can evidence that more than 20 hours a week are spent carrying out the type of work expected as part of a business operation, HMRC will not usually deny the relief. In the event that Incorporation Relief is not available, the taxpayer may be able to claim Gift Holdover Relief instead.

Further Guidance & Useful Links

Capital Gains Tax: what you pay it on, rates and allowances: Overview – GOV.UK (www.gov.uk)

HS276 Incorporation Relief (2022) Roll-over relief on transfer of a business – GOV.UK (www.gov.uk)

CG65715 – Transfer of a business to a company: conditions for relief: meaning of ‘business’ – HMRC internal manual – GOV.UK (www.gov.uk)

HS295 Relief for gifts and similar transactions (2020) – GOV.UK (www.gov.uk)

How Inheritance Tax works: thresholds, rules and allowances: Rules on giving gifts – GOV.UK (www.gov.uk)

IHTM04060 – Lifetime transfers: when is the estate of another individual increased? – HMRC internal manual – GOV.UK (www.gov.uk)

IHTM04067 – Lifetime transfers: what is an immediately chargeable transfer? – HMRC internal manual – GOV.UK (www.gov.uk)

Stamp Duty Land Tax: transfer ownership of land or property – GOV.UK (www.gov.uk)

SDLTM33380 – Transfer of a chargeable interest from a partnership – Para37 – HMRC internal manual – GOV.UK (www.gov.uk)

SDLTM33710 – Overview of Para 18 – HMRC internal manual – GOV.UK (www.gov.uk)

SDLTM33720 – Chargeable consideration – Para18(2) – HMRC internal manual – GOV.UK (www.gov.uk)