Property in Someone Else’s Name Tax Implications

Putting a property in someone else’s name can be sensible planning. However, it is not always straightforward, and documentation is key.

Consider the following scenario. A friend’s parents devised a genius plan: uncle needs to clear his mortgage of £200,000. Dad will buy uncle’s flat in Manchester for £200,000 to pay the bank, then let him live there rent-free. To help his two (adult) children, he decided to buy it in their names and instructed his conveyancer to draft the documents.

Two years later, the daughter wants to understand the impact for the family members:

• Connected parties – despite agreeing to sell the flat for £200,000, uncle is deemed to sell at market value for tax purposes. This is fine for the uncle as any capital gain should be fully covered by capital gains tax (CGT) main residence relief (MRR). Good news for the children, as their CGT base cost is deemed to be the market value (broadly 50% each).
• Gift with reservation of benefits (GWR) – the sale at undervalue by the uncle is a gift for inheritance tax (IHT) purposes, but as he continues to use the flat, the value of the gift is still included in his estate under the GWR rules.
• Gift of deposit – is the £250,000 a gift to the children, or a loan from dad? As is often the case, there is no documentation setting that out. If it is a gift, there is no IHT provided dad survives seven years, failing which the children could potentially have an IHT bill.
• Stamp duty land tax – the amount paid was below £250,000, and neither child owned other property, so no stamp duty land tax (SDLT) arose. However, when the children come to buy their own homes, they will be liable for an additional 5% SDLT surcharge and will forego their first-time buyers’ discounts. This will also apply if either child’s spouse buys the property, as the SDLT rules generally treat married couples as a single unit.

She was already looking worried; her brother was buying a house and was aware of the SDLT issue. Dad came up with a solution – brother transfers his half to his sister, and she owes him the money until she sells the flat. This can be looked at in two ways:

• Gift to sister – this will again be treated as a sale at market value. As brother hasn’t lived in the flat, he will have a CGT charge even though he receives no payment. It’s also a gift for IHT purposes, so he needs to survive seven years.
• Trust arrangement – if it’s a transfer in name only, there may be no tax; but it doesn’t fix the brother’s SDLT problem.

There is no easy solution, and what the father hoped would be a neat and helpful gesture has turned into a nightmare.

In addition to tax, there are other issues that could come up: has the uncle deprived himself of assets if he needs care in the future? What happens on the death or divorce of the children?

When it makes sense

Despite these downsides, there may be genuine and beneficial reasons for putting property in another person’s name:

• A self-employed person might transfer to a spouse’s name for asset protection against creditors.
• Splitting assets with a spouse to utilise lower rate bands and allowances.
• Outright gifts to reduce one’s IHT estate (but watch the CGT and seven year clock).

Documentation is everything

Whenever property is transferred, you must carefully document the intentions and the agreement; otherwise, the expected tax treatment can be undone. Similarly, agreeing on what happens to the future income or sale proceeds from property, or if someone dies, divorces or is made bankrupt, is imperative.

Practical tip

Transferring property to someone else is complex and can lead to unexpected results. Always get thorough advice, and make sure to carefully document all the arrangements.

Disclaimer: The information provided on AccountingFirms.co.uk is for general informational purposes only and should not be considered professional accounting, tax, or legal advice. Always consult a qualified accountant or tax adviser for advice tailored to your individual circumstances.