FT Q&A: What are the tax implications of selling half my flat to my younger sister? - Boodle Hatfield

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19 Nov 2019

FT Q&A: What are the tax implications of selling half my flat to my younger sister?

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I own a flat in London, but I now have a baby and am looking to buy a house further out and commute.

I would like to keep the flat as an investment but I can’t afford two mortgages given the unfavourable tax treatment of buy-to-let income.

What are the tax implications of selling half of my flat to my younger sister? We would own it as tenants in common. My outstanding mortgage would then be halved, and she would pay the monthly service charge. I would then purchase the house with my fiancé. What are the tax implications? I assume that if we sold the flat at a later date, my half would be liable for capital gains tax as it would no longer be my primary residence.

Chris Groves, partner in the private client and tax team at law firm Withers, says the sale of half your London flat to your sister would be a disposal for capital gains tax purposes. On the basis that the flat has been your main residence throughout the time you’ve owned it, any gain — if you are lucky enough to have one — would be free from capital gains tax thanks to the principal private residence (PPR) relief. If this is not the case, all or part of the gain is taxable at up to 28 per cent.

Your sister would need to pay stamp duty land tax (SDLT) on her purchase. SDLT is payable at graduated rates up to 12 per cent and, if your sister has another home already, she will pay the additional 3 per cent surcharge on the normal rates.

From a practical point of view, you would need to obtain consent from your mortgage lender for the sale.

When you buy your new house, you will also need to pay SDLT and because you still own an interest in your flat you will also pay the 3 per cent surcharge. As you have to pay the surcharge, your fiancé will also have to do so on their share of the house you buy. However, this can be reclaimed if you sell your remaining interest in the London flat within three years of the purchase of the house.

Assuming you don’t continue to use the London flat after you buy your house, then the new property should qualify for PPR relief as your main residence and on a future sale — assuming you do not move again to another property — any gain would be relieved from capital gains tax.

When you sell your remaining interest in the London flat, assuming you qualified for PPR relief on the sale to your sister, only a proportion of the gain in value over your total period of ownership will be subject to capital gains tax at up to 28 per cent. That proportion is equivalent to the proportion of time for which it was not your main residence (less an 18-month grace period, falling to nine months for sales after April 2020).

You are right that the tax treatment of buy-to-let properties has become increasingly unfavourable, as has that of second homes. This is deliberate government policy to discourage the acquisition and retention of second homes and buy-to-let properties by individuals and there may well be further steps in that regard in future, regardless of the outcome of the election.

Kyra Motley, partner at private wealth law firm Boodle Hatfield, says that if you do sell half of your interest in your London flat, there are a few tax points to consider. We assume that you will sell this to your sister at its current market value, as selling for less than this can invite various tax risks, particularly if you continue to use the flat, even infrequently.

First, the sale is a disposal for capital gains tax purposes. Generally speaking, to calculate a taxable gain you deduct the price you paid for an asset (your “base cost”) from the sale proceeds you receive for it. Certain other expenditure can also be deductible.

Where you make a disposal of only part of your interest in an asset, particular “apportionment” rules apply to determine, first, the taxable gain and, second, the base cost for your remaining interest in the flat. These rules technically require you to value your remaining share in the flat as at the date of the sale, but here this should correspond to the price your sister is paying you.

However, if the flat has been your only residence during your period of ownership PPR relief would be available on the full amount of any gain realised. There are circumstances which might affect whether this relief is available, for example if you have ever lived away from the flat for long periods. You will need to consider whether these are applicable.

In the future, if you sell the flat (or your remaining half-interest), capital gains tax will again be relevant. If you have been living elsewhere as you plan to do, PPR relief will not be applicable to the full amount of the gain. Your base cost for this half would be a proportion (broadly speaking 50 per cent) of the original price of the flat. A time apportionment exercise applies to calculate how much of the gain can be relieved.

Second, your sister will probably pay stamp duty land tax on her purchase. The rates she pays will depend on whether she already owns a home herself.

Third, it is worth briefly remembering that your half of the flat would potentially be subject to inheritance tax at the current rate of 40 per cent on your death, taking into account any reliefs available. Anything you leave to your fiancé will be exempt from inheritance tax as long as you have married prior to your death.

Regarding buying the house with your fiancé, your assumption that you will need to pay the additional rates of SDLT is correct. These rates will apply to the entire purchase price for the house, not just your half.

The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.

This article first appeared in the Financial Times on 19 November 2019. 

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