Gifted Deposits Trigger CGT Problems For Landlords

Working out the capital gains tax value of a buy-to-let home with a gifted deposit is fraught with problems for property investors. 

Some buy-to-let lenders encouraged developers to offer gifted deposits and were happy that the measure lifted the loan-to-value. 

But investors with highly leveraged properties who pay income tax at 40% or more now face paying tax on their wealth rather than their property business profits from April 2016, thanks to a change in the way tax reliefs are applied to mortgage interest. 

Instead of claiming tax relief at 40%, these high earners now face mortgage interest tax relief sliced in half by 2020, increasing their tax while decreasing their profits simultaneously. 

As a result, many are considering their tax options and selling rental properties. 

In a recent case before the First Tier Tax Tribunal, Day and Dalgety v HMRC [2015] UKFTT 142 (TC), the tax office challenged a taxpayer who had calculated the purchase price of buy to let properties less the gifted deposit rather than including the money.

One of the tribunal's tasks was to determine how much the taxpayer had sold a home for when gifting a 5% deposit to the buyer. 

HMRC argued the price was the figure on the Land Registry records - £66,300 even though the buyer had paid £62,985 through a Halifax Building Society vendor paid deposit scheme. 

The tribunal accepted this was an official scheme run by Halifax and decided the sale proceeds were the lower figure, not the Land Registry listed price of £66,300. 

However, the tribunal judge Rachel Perez pointed out that if the lender had agreed to the gifted deposit, then this was acceptable. However, gifting the cash could be considered fraud if the arrangement was not disclosed to the lender. 

“If the sellers had fraudulently paid the deposit to help the buyer gain a mortgage that they might well have not qualified for otherwise, then we do not consider the sellers could rely on that fraud to reduce the tax they paid,” said the judge. 

For property investors who bought buy-to-let homes with gifted deposits with the lender's knowledge, the purchase price for capital gains tax purposes is the property value less the deposit amount. For those with private arrangements not declared to lenders, the purchase price is the property value, including the gifted deposit.