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Should I Gift or Use a Lease?

Question
 
I want to give my godson a property I bought for him some ten years ago. I do not want to pay capital gains tax unless I have to. Is it not possible for me to grant him a long lease of say 60 years at a nominal rent and then in a few years time allow him to extend the lease and then buy the ground rent? The property currently has a value of about £300,000 and was originally purchased for £150,000.

Arthur Weller Replies:

Your idea is a good one. Unfortunately others have been down this route already. If you look on HMRC Capital Gains Manual page CG70752 (http://www.hmrc.gov.uk/manuals/CGmanual/CG70752.htm) you can see that it says: “A long lease is a lease with over 50 years to run... long leases are treated in the same manner as freeholds”. 

Furthermore, since this not a 'bargain at arm’s length (see their page CG14530 (http://www.hmrc.gov.uk/manuals/cgmanual/CG14530.htm), the market rule will apply and you will be treated as disposing of the property at its 'present market value', irrespective of the amount your godson pays you for it. 

If you are really determined to avoid capital gains tax (CGT), you could consider transferring 6% of the property to your godson this tax year, and doing a similar disposal for the next 15 plus years, in a way that the gain triggered each year is less than the CGT annual exemption (currently £10,100).

Property Tax Insider This sample question and answer is taken from Property Tax Insider, a monthly UK tax saving magazine for landlords and property investors.

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