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How to deal with gifted deposits on buy to let sales

2 March 2016

Many landlords are considering their financial options in the face of a massive tax grab by Chancellor George Osborne starting next April.

From then, mortgage interest relief is reducing to 20% for higher rate taxpayers and property business profits are to be calculated on wealth rather than income.

Instead of linking tax relief to income levels, lower rate tax payers will also see the way their taxable income is calculated change – pushing some into a higher tax bracket.

In the past, many landlords with large portfolios likely to be hit hardest by this tax change bought their buy to let homes with gifted deposits as the measure allowed them to complete ‘no money down’ deals and buy more properties.

Now they may consider selling to avoid the tax crackdown, they may find they have a problem with undeclared gifted deposits.

The issue was considered earlier this year by the First Tier Tax Tribunal.

Judge Rachel Perez concluded that capital gains tax on selling a property bought with a gifted deposit could be calculated in one of two ways:

• If the gifted deposit was declared to a mortgage lender, then the buying price for CGT purposes is the property value less the gifted deposit

• If the deal was done without the agreement of the lender, then the case could be considered mortgage fraud and the purchase price is the full value of the property

“If the deposit was fraudulently paid in order to help the purchasers obtain a 95% mortgage, we might well not have been persuaded that the appellants could rely on that fraud to reduce their tax liability,” said the judge.

The same rules apply to any property investor selling a buy to let home by encouraging the buyer with a gifted deposit.

Read the case, which includes details of how to work out a CGT computation on the sale of a letting property