Gifting Residential Property - Capital Gains Tax Considerations

Since the Autumn 2024 Budget announced an intention to impose a £1m cap on 100% agricultural and business property reliefs from 6 April 2026, many farming families have been considering passing parts of the farm to the next generation during lifetime.

This contrasts with the accepted position for decades that farm property was best kept in the older generation’s ownership, for protection from family divorce and other financial risks, to provide inheritance tax (IHT) sheltered security for those who built up the wealth, and to achieve capital gains tax (CGT) rebasing on their deaths.

Market value rule

A lifetime gift of property is a disposal for CGT purposes and, where the gift is to a family member, the market value at the time of the gift will be treated as sales proceeds, potentially resulting in a hefty CGT cost.

Taking advice before committing to decisions will allow any potential reliefs or opportunities to mitigate the CGT exposure to be considered.

Brought forward losses

Some farmers will have realised CGT losses (albeit usually small) on the cessation of the Basic Payment Scheme and, although it was a while ago now, some still have large CGT losses remaining from the abolition of milk quota. These losses may augment any available reliefs.

CGT reliefs

There are different CGT reliefs which might potentially be available depending on the circumstances – for example, main residence relief, rollover relief and holdover relief.

Where the owner has previously lived in the dwelling (eg perhaps having lived in the farmhouse before building and moving into a new house on the farm), main residence relief will be available for the period of occupation. This should be considered before any other reliefs because, where main residence relief can exempt part of the gain, this can be very valuable.

Where the owner is still trading either as a sole trade or within a partnership, if the dwelling was previously used by the business (eg where it is a converted farm shed), or if it was occupied by a farm employee (not partner or family member), partial rollover relief might be available, if the owner will incur further expenditure on new land or new buildings on the farm. This might defer the gain until the retained land is sold, and the gain would fall away completely if the land is retained until death.

Another possibility may be holdover relief on a gift to the family. Holdover relief is available on business assets, agricultural property and transfers into most trusts.

Where properties are owned jointly, exchange of joint interests relief may provide opportunity to reduce or avoid the CGT charge on re-arranging the ownership.

Modifying the plan

It may be that the dwelling does not currently qualify for relief but if the intention is for a farm employee to occupy it in the future, perhaps the gift could be delayed until the farmworker has lived there for a few years; at which time full holdover relief might be available.

If the intention is for the dwelling to be gifted with surrounding land, in some cases, the availability of holdover relief may be determined by the use of this land and, if that qualifies for agricultural property relief, full holdover relief might be available on the gift of the land with the dwelling included.

With regards a rental property in particular, the gift might be made into a trust, instead of the family member personally. Trusts have other tax considerations but, in the context of CGT, a gift into trust almost always qualifies for full holdover relief, provided the current owner cannot benefit from the trust. Making the gift to a trust therefore reduces the risk of a failed holdover claim.

Evidence

In all cases it is important to retain sufficient documentary evidence to support a claim. In the event of enquiry, HMRC are likely to require proof. This is more likely where substantial tax is at stake.

Conclusion

Each case differs depending on the specific circumstances and intentions of the family but there is often considerable opportunity to significantly mitigate tax liabilities with detailed planning before any changes are made.

Please contact us before you proceed with transferring property within the family.