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My daughters each own a house (outright, no mortgage); one in Oxford and one in Cambridge.

Due to changing work locations they now wish to swap ownership of their houses.

Our solicitor has advised that this can easily be done through a Deed of Gift but has declined to advise on the implications for capital gains tax when either property is sold.

It is highly likely that the Cambridge house (which has been my eldest daughter’s main home from purchase in 2020) will be sold next year after she transfers ownership to her sister.

As the house has increased in value since purchase, we would like to understand any potential liability for CGT when it is sold.

Heather Rogers replies: The tax implications of gifting property to family members is a common inheritance tax planning question but I have not had one about house swaps before!

That said, although it may seem unusual, house swaps are not as rare as you would think.

When considering such a move, there are three taxes which have to be considered – capital gains tax, inheritance tax and Stamp Duty Land Tax.

I will look at these in turn, before making some further remarks on your daughters’ situation.

It is worth noting the rules are the same regarding all the tax issues to consider whomever you are house swapping with in principle.

If the swap transaction is with someone who is not a ‘connected party’ (more on this below, but this includes siblings), the market value of a property is still used, unless it is a normal commercial transaction in which case it is the amount you actually paid.

1. Capital Gains Tax

Even though this transaction is that of a swap rather than two independent sales, it doesn’t change the way such a transaction is treated for capital gains tax.

On any transfer of property between ‘connected parties’ the market value of that property must be taken into account rather than the amount of money actually being paid.

Will your daughters have to pay CGT?

If each property being swapped was the main or only residence of its owner prior to the swap, then Private Residence Relief (PRR) should be available in the same way that it is available when you sell your home and move to another, and no capital gains tax will be due.

Similarly after the swap, providing the new home remains the main residence of its new owner, then PRR should be available should the new home be sold, again in the same way as if you sell your home, move to a new one and then sell the new one to move again.

There are some exceptions to the availability of Private Residence Relief which you should check do not apply in this situation.

However, if one of the properties being swapped was a second home, or was rented out at any time, capital gains tax would be payable, in the same way as if you sold a second home or a property that you had rented.

The amount due would depend on the profit made, in other words the market value at time of the swap, less what was paid and the costs of any improvements and any period where it qualified for any other relief.

What is meant by connected parties?

A person is connected with an individual if that person is:

– A spouse or civil partner

– A relative (brother, sister, ancestor or lineal descendent, but not nephews, nieces, uncles and aunts)

– A spouse or civil partner of a relative

– A relative of a spouse or civil partner

– A spouse or civil partner of a relative of a spouse or civil partner.

2. Inheritance Tax

If no money is being paid, in theory both houses in this case are gifts.

However, because for gifting one house, the gifting party is receiving another house, then the actual gift is the difference between the value of the properties.

For example, if A gives B a house worth £300,000 but only receives from B a house worth £280,000, then A has gifted B £20,000.

This gift is known as a PET (Partially Exempt Transfer). If A survives seven years, then no inheritance tax would be due on the gift.

Gifts are deducted from the person’s nil rate band first (currently £325,000 – see the box below) so if A hasn’t gifted more than the nil rate band in the seven years before their death, then no inheritance would be payable on the gift in any case, even if they died within seven years.

This situation can be avoided by payment of the difference by the person receiving the higher value property.

Importantly, once the swap has taken place there should be no further benefit received by the owner of the gifted property, or it will be classified as a ‘gift with reservation of benefit’ and this will change the inheritance tax position.

3. Stamp Duty Land Tax

Normally, there is no stamp duty payable on a gift, but there may be a liability if the properties are not equal in value, or if there is a mortgage on one or both of the properties which are being transferred.

There may be higher rates of stamp duty to pay if one party already owns another property. This is a question that your solicitor should review.

Further tips for your daughters

In this case, if the properties currently are the main homes of both the sisters and will remain so up to the date of the swap, PRR should be available subject to the exceptions in the link above.

Any difference in value will be a gift by the owner of the higher value property to the other.

To avoid a gift, the difference could be settled by a payment.

Providing the property to be sold is the main home of the new occupant from the date of the swap up to when it is sold, then it should qualify for PRR.

I recommend having both properties valued by a qualified surveyor, so if there is a query later from HMRC, you have an accurate valuation at the time of the swap.

It also means that if one of the properties does not remain as a main residence (it is rented out in future, for example), you have an accurate ‘purchase price’ for CGT purposes.