Ask Money: how can we help our daughter financially?

Patrick Connolly at Chase de Vere addresses a Money Observer reader’s question about how he and his wife can help their adult daughter.

December 8, 2018

My wife and I own a rental property that provides us with a modest income that supplements our pension income. Our daughter, who will be the sole beneficiary of our reciprocal wills after we both die, has recently had to give up work due to illness, so we are considering options to help her financially by executing part of her legacy in advance. We feel that if we were to offer her direct cash, pride (though virtuous) would override practicalities and she would refuse it.

We are considering making her the legal owner of either a third or, at the expense of either my wife or me, half the rental property. She would benefit from a regular rental income and, potentially, pro rata capital raised from its sale.

Could you please clarify the tax implications of this proposal. How many owners can claim personal capital gains tax allowances should we choose to sell the property? The ownership transfer will be carried out through a change to the property deeds, but will such a transfer of assets be regarded by HMRC as a gift and therefore be subject to the seven-year rule regarding inheritance tax? 
Graham Dickinson, by email

Patrick Connolly at Chase de Vere replies: What you suggest may sound logical, but there are potential pitfalls. Perhaps start by establishing whether your daughter would accept a cash gift, a more straightforward option.

If you and your wife gift a share of the property to your daughter, there may be capital gains tax, inheritance tax, income tax and stamp duty implications to consider. If you gift her a share of the property, this will be considered a disposal for CGT purposes. As your daughter is a ‘connected’ person and the property isn’t your main residence, the market value of the property will be used to determine whether there is a CGT liability. If there is a gain on the amount gifted, you and/or your wife may be able to use your annual CGT exemptions, currently £11,700 a year each (but rising to £12,000 a year from April 2019), to reduce or negate any tax liability. If you and your wife both gift some of the property to your daughter, you can use both your exemptions.

CGT on residential property is charged at 18 per cent for basic-rate taxpayers and 28 per cent for higher- and additional-rate taxpayers. Both these rates are 8 per cent higher than the rates on other asset types.

Note that if you gift the property to your daughter, CGT may be charged, but if it is passed to her on your deaths, there will be no liability. If you gift a share of the property to your daughter absolutely, this will also be considered a transfer for inheritance tax purposes. It is likely to be a potentially exempt transfer, which means that if you live for seven years after making the gift, it will be outside of your estate for IHT purposes. 

If your daughter subsequently owns a share of the property, she will be entitled to the relevant share of the rental income produced and will pay any income tax liability on this share.

Stamp duty won’t be payable as long as there is no outstanding mortgage on the property. If there is, there may be a charge if the outstanding mortgage on the property gifted exceeds £125,000. Stamp duty may be charged at the surcharge rate if your daughter already owns a residential property.

There could be problems if you want to sell the property and your daughter doesn’t, or vice versa. If she is married or in a civil partnership, or marries or enters a civil partnership in future, and the relationship breaks down, her ex-partner could claim a share of the property. Similarly, you will have no control over who your daughter leaves her share of the property to if she dies before you

If you need help with a tax, pension or financial planning problem, please email: moneyobserver.ed@moneyobserver.com

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