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. In some circumstances, Capital Gains Tax might be payable on a transfer of equity 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).
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.
The Capital Gains Tax allowance of the 2021/22 tax year £12,300 (the same as the 2020/21 tax year). 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.
Read more:
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.
See also:
Do I pay Stamp Duty Land Tax (SDLT) on a transfer of equity?
Disclaimer
Completely Moved 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.
