Reducing CGT in gifting house to kids.

happyhero · 2 December 2017 at 2:30PM

Need some tax advice for my daughter. Not sure exactly when but about 5 years ago my son in laws parents although not very well off came into some money through selling their part of a business and they decided to use the money to buy my son in law and daughter a house not to own but to live in for now, as they had no chance of getting in the property ladder. They bought a house for £135,000 in my son in laws mothers name so that she owned it but would one day give it to them. They already owned their own place.

Five years on she now wants to gift it to them and going by the recent house next door sale which is an identical house it would sell for £280,000.

Looking at gifting a house on Google it seems she will have to pay Capital Gains Tax at 28% which I calculate would be £40,600. So they can't afford this and so can't go ahead at present as they try to think of a solution. They have said that my son in law and daughter must pay it or find a solution.

I'm not sure that my daughter could get a small mortgage as they don't have the best credit rating and don't have the equity to back it up unless this house now counts.

So it's a big cost they want to try and reduce basically.

And so my questions are

Is there a way to remove the CGT altogether?

Is there a way to significantly reduce it?

Is there a way to pass the house on that avoids CGT?

Any other suggestions how to handle this?

00ec25 · 2 December 2017 at 3:28PM

happyhero wrote: »

And so my questions are

Is there a way to remove the CGT altogether? NO,
mother in law owns a property which she does not live in therefore it is and always will be liable

Is there a way to significantly reduce it? partially yes, significantly, not really

option 1.
mother in law would need to move into the property herself and live there as her main home. If Father in law is still alive and married to her he would need to move too since a married couple must have one home between the two spouses

option 2
a further way to reduce would be to make FIL a co-owner as MIL can gift a share to her own spouse tax free. That way the gain would be split between her and her husband and both would get their individual CGT exempt allowances so reducing the gain by 22,600 in total

for example as the gain is 145, if there are two owners then the gain would be reduced to 122.4

Is there a way to pass the house on that avoids CGT? yes, MIL dies and leaves the property in her will

CGT is triggered only when the ownership changes hands between 2 living people

if you inherit a property on death of its owner there is no CGT

the only relief from CGT is "Private Residence Relief" which exempts the property from CGT for the period you live in it as your own main home. Obviously if MIL still owns another property then that one would become liable to CGT instead, as she would no longer be living in the latter one.

As we assume MIL has not lived in it yet, that period will always be liable for CGT. In a nutshell say the gain is 100k and your daughter has lived there for 5 years. Your MIL now moves in an lives there for another 4 years and then transfers it to daughter.
In that case MIL has owned for 9 years, of which 4/9ths x 100k is exempt and 5/9 x 100K is liable to CGT

also bear in mind that all at 28% is the worst case scenario. You need to do the actual sums to see if any of the gain is taxable at 18%, although with a 135k gain it is certain the majority of that will be at 28%. I note however your calculation of 40.6 has ignored MIL's CGT exempt amount (currently 11.3k)

Note also that if MIL still owns the property when she dies it will form part of the value of her estate for inheritance tax purposes. There may not be any IHT to pay given what you say about their relative "poverty" but it sounds like both you and they need to take proper financial planning advice to deal with the balance between the various taxes that are already in play

madgagoo · 2 December 2017 at 8:43PM

Look at gifting through a trust and using holdover relief. It's not straightforward and isn't without consequences further down the line but is a way of avoiding CGT now.

A solicitor and a proper tax advisor would be recommended.

Tom99 · 2 December 2017 at 9:42PM

After taking the above advice on reducing the CGT it would be a very small LTV mortgage that was required.

00ec25 · 2 December 2017 at 9:47PM

madgagoo wrote: »

Look at gifting through a trust and using holdover relief. It's not straightforward and isn't without consequences further down the line but is a way of avoiding CGT now.

A solicitor and a proper tax advisor would be recommended.

that is a nice understatement and certainly a case for extensive number crunching as to the values involved versus the fees for so doing

Reducing CGT in gifting house to kids.

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