Dad wants to give me a flat for free, so why tell the taxman?

Question: My dad’s thinking of giving me the basement flat of his house. This flat has been rented out separately from the house for the past 40 years. However, our solicitor says that Dad has to pay capital gains tax if he makes the flat a separate entity and gives it to me — even though no money is changing hands. Is he right? How will the “capital gain” be assessed?Answer: It isn’t strictly dependent on whether the flat is a ‘separate legal entity’. HMRC will take that into account, but are more concerned with the physical circumstances.

If the flat is and always has been quite separate from the rest of the house as occupied by your father, then the flat and the rest of the house will be treated as two separate assets.

A gift of the flat will be treated as a disposal of the flat by your father at current open market value. This will give rise to a gain measured as the difference between the value at the date of the gift, and the open market value of the flat on 31 March, 1982.

An estate agent should prepare those valuations and must understand that they are needed for tax purposes.

If the flat is integral with the rest of the accommodation in the house, which from your description seems unlikely, then if your father gifts the flat to you he may be able to claim at least a partial exemption in relation to the capital gain though maximum relief is only £20,000 of gain.

The calculations can be quite complex and your father should seek advice from an accountant or other tax adviser on his likely tax exposure.

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If you have a question for Fiona McNulty, email legalsolutions@standard.co.uk. We regret that questions cannot be answered individually.

Fiona is a partner in the residential real estate team at Thring LLP (www.thrings.com).

These answers can only be a very brief commentary on the issues raised and should not be relied on as legal advice. No liability is accepted for such reliance. If you have similar issues, you should obtain advice from a solicitor.