Do I have to pay Capital Gains Tax (CGT) on a transfer of equity?

A transfer of equity is when a property owner either adds or removes one or more people to the title of the property. A transfer might, for example, be carried if a parent is gifting a property to a child, or if a couple is getting married or separating.

Depending on the circumstances, Capital Gains Tax (CGT) may need to be paid by the transferor (the person giving away or selling their equity).

See also:

Do I have to pay Capital Gains Tax when I sell my home?

Do I need to pay Capital Gains Tax if I am giving equity away?

Maybe. You may still need to pay CGT even if you don’t receive anything in exchange for the equity you have given to someone else. Whether CGT is due depends primarily on who you give the property to:

Transfers to a spouse, civil partner or charity

If you are ‘gifting’ (giving away) the property or a share in the property, to a spouse, civil partner or charity you would not have to pay any CGT.

Transferring equity to a child, sibling or another person

If you transfer equity in a property to a child, sibling or a person that is not your spouse or civil partner, you may need to pay CGT.

The amount of CGT you will need to pay will be calculated based on the increase in value since you acquired the property (or your share of the property).

Although CGT is due if you give away your main residence, you may be able to get full relief (Principal Private Residence Relief). Full relief would mean you pay no CGT. There are restrictions on this relief, including a requirement that you must have used the property as your main residence for the entire time you owned the property.

Inheritance tax (IHT) may also be due if you die within 7 years of the transfer.

How much capital gains tax would I have to pay on a transfer of equity?

If you are liable for CGT, you have an annual CGT tax allowance.

For the 2020 to 2021 tax year the capital gains tax allowance is £12,300. This means that you can make a capital gain of £12,300 tax-free. You would also be able to deduct any allowable cost such as stamp duty.

If the capital gain is greater than £12,300, the transferor will have to pay CGT. This would be calculated by deducting the £12,300 annual allowance from the capital gain and adding it to your taxable income.

You would then pay CGT at a rate of 18% on the amount of the gain that falls within the basic tax rate and 28% on any amount above the basic rate.

For example:

Annual income (excluding capital gains) of £25,000 Amount
Property purchase price £100,000
Property value at the point of transfer £200,000
Allowable costs* (stamp duty paid, legal fees etc.) £1,000
Capital gain £99,000 ((£200,000 - £100,000) - £1,000)
Less annual CGT allowance (Tax year 2021 - 2022) £12,300
Taxable gain £86,700
Annual income (excluding capital gain) £25,000
CGT payable at basic 18% rate (Basic tax rate band of £50,000, less income of £25,000) £4,500 (18% of £25,000)
CGT payable at 28% (amount of capital gain above £50,000) = £86,700 - £25000 = £61,700 £17,276 (28% of £61,700)
Total CGT Payable £21,776 (£4,500 + £17,276)

*You may be able to deduct a range of allowable costs and expenses you have incurred during your purchase and ownership of the property, such as estate agents’ fees and property maintenance costs.

When do I have to pay Capital Gains Tax after transferring equity?

The CGT usually must be reported to HMRC within 30 days of the transfer. You can pay the CGT immediately, or report the CGT when completing a Self Assessment tax return in the following tax year.

You may be able to pay the tax in instalments, but you will need to discuss this with HMRC.

See also:

Do I have to pay capital gains tax when I sell my home?

Speak to a tax advisor

Whatever your circumstances, and even if you are confident there is no tax to pay, you should get professional advice from a tax specialist or accountant. Capital Gains Tax is a complicated area, and the rules include numerous exceptions and exemptions.

Without specialist advice, you may miss out on the chance to offset other losses against your CGT liability, and you could end up paying considerably more CGT than you need to.

How can Quittance help?

Whether you are gifting a property to a child, getting married or separating, or transferring equity for any other reason, our panel of conveyancing solicitors can take care of the legal work for you. Even if you are just looking for advice, we can help.

If you are also planning to remortgage as part of the transfer process, we can complete the remortgage legal work at the same time as your transfer of equity.

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Disclaimer

Quittance Legal Services does not provide tax or accounting advice. This article is provided for informational purposes only and should not be relied on for, tax or accounting advice. You should consult with your own tax and accounting advisors.

Chris Salmon, Director

Author:
Chris Salmon, Director