OVERVIEW
Overview
A gift with assumed debt transfers property while the recipient takes on the debt attached to it. Tax law divides the transaction in two. The portion matched by the assumed debt is treated as transferred for consideration and charged to capital gains tax on the donor, while gift tax is charged on the recipient in respect of the remainder. It can therefore be more favourable than a straight gift, and it can equally be less favourable where the donor's capital gains tax is substantial.
VALUE Tax & Accounting calculates a straight gift, a gift with assumed debt and a sale on the same basis, and compares the total tax and the cash flow of each. Whether the donor satisfies the single-house exemption requirements, or is instead subject to the heavier rate as a multiple owner, changes the outcome considerably. Because an assumption of debt between spouses or between lineal ascendants and descendants is in principle not recognised and is presumed to be a gift, evidence that the debt has genuinely passed and that the recipient is servicing it personally is essential.
KEY ISSUES
Key tax issues in a gift with assumed debt
-
01
Separating the assumed debt from the gift
The proportion matched by the assumed debt is treated as a transfer for consideration and charged to capital gains tax on the donor; the remaining proportion is charged to gift tax on the recipient. Both must be calculated together to establish the real burden.
-
02
The donor's capital gains tax position
Where the donor satisfies the single-house exemption requirements, there is little or no tax on the portion treated as a transfer and the arrangement is favourable. Where the donor is instead subject to the heavier rate as a multiple owner, it can be unfavourable.
-
03
Evidencing an assumption of debt within the family
For an assumption of debt between spouses or between lineal ascendants and descendants to be recognised, objective evidence is required. The lease agreement, the documents transferring the loan and the record of interest payments must be in place.
-
04
The source of funds for repayment
Whether the recipient actually repays the assumed debt is examined. Where the donor repays it instead, that amount is charged to gift tax in turn.
-
05
Acquisition tax and incidental costs
On a gift with assumed debt the rate for a transfer for consideration applies to the assumed debt and the rate for a gratuitous transfer to the remainder. Because the two rates apply separately, the total cost must be calculated in advance.
HOW WE HELP
How VALUE Tax & Accounting responds
Comparing the three routes
We calculate a straight gift, a gift with assumed debt and a sale on the same basis, and compare the total burden of gift tax, capital gains tax and acquisition tax together with the cash flow.
Putting the assumption of debt in order
We set out the steps required for the debt genuinely to pass, including succession to the lease and transfer of the loan, and help assemble the supporting evidence in advance.
Filing and the position afterwards
We file the gift tax and the capital gains tax within their respective deadlines, and organise the record of repayment of the assumed debt in preparation for later review.
FAQ
Gift with assumed debt FAQ
Q Is a gift with assumed debt always favourable? expand_more
No. The capital gains tax charged on the donor can exceed the gift tax saved. The outcome depends on the donor's house count, holding period and acquisition value, so it should be calculated before a decision is made.
Q If a tenanted property is given to a child, what happens to the deposit? expand_more
Where the child takes on the obligation to return the deposit, that amount is treated as transferred for consideration and charged to capital gains tax on the donor. The landlord named in the lease agreement must actually be changed as well.
Q Can the loan simply be left in place and the title changed? expand_more
The lender's procedure for changing the borrower must actually be completed for the debt to be treated as assumed. If the borrower is unchanged the debt has not passed, and the whole transaction may be treated as a straight gift.
Q What if the parent pays the interest because the child cannot? expand_more
Interest and principal paid on the child's behalf can be charged to gift tax in turn. Establishing first whether the recipient can service the debt from their own income is essential.
Q Who files, and how? expand_more
The recipient files the gift tax and the donor files the capital gains tax. The deadlines differ, so the timetable has to be managed together.