Do I have to pay tax on exchange of financial assets?

skiingelephants

Hi all,

I currently have quarter of a property in my name, signed over to me years ago by my father as he was worried about inheritance tax under Gordon Brown. My father still lives there today. My mother has seen that I'm struggling with the mortgage on my own home and she's said she'll pay off our mortgage (or a large chunk of it). In exchange, I've said I'll sign over the quarter of my father's property to her.

It feels, from one perspective, that this is just two gifts. My mother wants to help me out and I want to give something back. A friend mentioned that it looks like a sale for tax purposes and I might need to pay capital gains (the friend is like me, no tax knowledge). HMRC could decide to jump on me at some point and demand I pay capital gains on the money that my mother will have paid off the mortgage, which would meaning selling my property anyway to pay it.

I'm not an accountant so if this is or isn't a thing, I have no idea. But I don't want to take the chance of being hit with a tax bill because of my mother's gesture.

Thanks in advance

molerat

You are disposing of an interest in a property that is not your principle residence so CGT will come into play.  No dressing it up as anything else will alter that fact.

uknick

And before you ask, if you do transfer the share to your mother, it has to be done at market value as it's a "related party" transfer.  With regard to the value, if you think the gain may lead to a tax liability, speak to a professional valuer to see if the market value can be reduced by the fact the property has an occupier who won't be moving out, your father. 

Jeremy535897

Yes, the issue for capital gains tax is that it is a disposal. Even if you simply gave the property to your mother without anything in return, you would realise a capital gain, based on the market value today, less the market value at the date of gift from your father.

I am not clear why anyone thought this would achieve anything for inheritance tax, as it would have been a classic gift with reservation unless your father always paid you a market rent for the use of the property. I mention this because it may mean that something more sophisticated was done, rather than a simple assignment of part of the property to you. That could change the tax consequences of what is proposed.

There may also be stamp duty implications for your mother if she is treated as buying a share of the property in exchange for paying down your mortgage.