Capital gains upon a rental property.........

Capital gains upon a rental property.........

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A widow aged 52 has four rental properties and only needs about half of the rent roll. Why can't she sell a fraction of one property each tax year to her (adult) children so that her capital gain  each year is covered by her annual exemption for CGT. Over 8 years such a plan would save between £20k and £25k. Sounds too easy, where's the catch?

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By Euan MacLennan
18th Jan 2011 10:26

Series of transactions

Mike, thank you for the PM.  I'll have a go at answering your question.

Under s.286 TCGA 1992, lineal descendants (AKA children) are defined as connected persons.  Under s.18 TCGA, a transaction between connected persons is defined as not being at arm's length and hence, will be treated as made at market value under s.17, regardless of the price paid, if any.  Where someone disposes of assets to connected persons in a series of transactions, s.19 imposes a deemed consideration under s.20 for each transaction calculated as the proportion of the aggregate market value at the time of the individual transaction that the individual transaction bears to the total transactions in the series.

In other words, it is a sort of averaging over the whole series of transactions which requires the CGT calculation for earlier transactions in the series to be reconsidered in the light of the subsequent transactions.  If the market value of the property is determined at each individual transaction, the averaging rules under s.20 should not be a problem.  So, if you transfer 12.5% a year for 8 years, the deemed consideration for the transaction in Year 1 will be 12.5% of the MV in Year 1, then after the transaction in Year 2, the transaction in Year 1 will be re-assessed as 12.5/25 of 25%, i.e: the same 12.5%, of the MV in Year 1, and so on for the rest of the 8 years.

I hope that makes sense!

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By Mike Smith1
18th Jan 2011 21:13

Thanks

Many thanks Euan.

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By Steve Holloway
19th Jan 2011 08:28

Good answer!

Not just a pretty face!

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