An important area in Advanced Tax is gifts of residential property. The mistake students make is looking at the donees instead of the donor.

Charlie is a 85-year-old UK domiciled individual and has always lived in the UK. He owns a residential property portfolio that he purchased for £1m that has been let out. It is currently worth £2.5m and Charlie decides to gift it in equal shares to his two children, Jude, and Poppy. Charlie has used up his annual exemptions and is a higher rate taxpayer.

Sadly, Charlie dies of COVID a year later as he did not have his vaccination.

At the time of the gift, Charlie would have a capital gains tax liability of (2.5-1=1.5m x 28% = £420K) which will be payable by Charlie within 30 days of the gift.

Charlie is UK domiciled so is subject to inheritance tax on his worldwide assets in excess of £325,000. The gift to the children is called a potentially exempt transfer (PET) and is only taxable if Charlie dies within 7 years of the gift.

When Charlie dies, the PET of £2.5m is taxable. The inheritance tax liability will be (2.5m-325K x 40% =£870K) will be payable by Jude and Poppy as they received the gift.

Don’t forget to have your jabs everyone!