Why Now May Be A Good Time To Give Away Property Assets

11 October 2010

The downturn in the property market and resultant decline in values has brought little cheer to most property owners. Surprising as it may seem, however, there could be an opportunity to turn this situation to your advantage arising from how Capital Gains Tax may be calculated on the disposal of a property asset. Disposal does not simply mean a sale, but also the transfer of an asset; for example, a gift to your children. For those fortunate enough to have accumulated property assets (other than your own home), there may come a time when you will wish to pass on those assets in the most tax efficient way possible. Now could be the right time to consider such a move.

The starting point for calculating a capital gains tax liability is the amount received on disposal. However, if the disposal was a gift then no cash would have been received. In these circumstances Market Value will be used instead. Market Value is an estimate of what the property could have sold for if it had been put on the open market. The higher the Market Value, the more likely you are to be liable to pay Capital Gains Tax and the higher that liability will be. Given that most property values have fallen significantly in recent years, and will hopefully start to recover in the near future, now may be an opportune time to gift an asset whilst minimising or even eliminating the Capital Gains Tax liability, particularly since CGT is set to rise from 18% to 28%.

Capital Gains Tax is a tax on the increase in value of the asset during your ownership. In order to reduce the gain, you can deduct certain costs incurred during your ownership including fees for professional advice and services and costs of improvements (excluding maintenance costs) and Stamp Duty Land Tax. If you owned the asset before 31 March 1982, the Market Value at that date can be substituted for the acquisition amount. Determining the Market Value of a property 28 years ago is a challenge for even the most experienced valuer! Whilst a reduction in value of an asset below the cost of acquisition is normally bad news, it could be that a loss in value in one asset can off-set against a gain in another asset thus reducing the overall Capital Gains Tax liability. Indeed, a loss can be offset against gains in subsequent tax years in certain circumstances.

The rules surrounding Capital Gains Tax are complex so it is best to take appropriate professional advice before making any decisions. A good tax expert has an important role to play, but so too has a Chartered Surveyor who specialises in valuation. Assessing Market Value, whether at the date of disposal or at 31 March 1982, is the skill of the valuer. Employing a valuer with the right experience and credibility is vital. Whilst valuations are submitted to the Inland Revenue as part of your tax return, the Revenue use the Land & Property Services (the Government’s valuers) to check the valuations. Consequently, valuations can be challenged if Land & Property Services disagree with the value submitted. The valuer you employ will need to be prepared to meet that challenge and defend the valuation if appropriate. The decision to gift your assets, to your off-spring or otherwise, is not one to be taken lightly. It will almost certainly involve more than good tax planning. However, mitigating the tax liability is usually an important consideration. A window of opportunity currently exists to do just that and wouldn’t it be nice to take some advantage from the current difficult property market conditions?

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