Second Property Tax Advice

BigTrev84 wrote: »

My wife's grandparents transferred the deeds of their house over to my mother-in-law approximately 12 years ago shortly before they passed away. This was not put through Probate. Now my mother-in-law has transferred the deeds of the house over to my wife last year as she is ill and now in a care home. The house doesn't have a mortgage. My mother-in-law has another home, so its not trying to avoid nursing care fees. The deeds were put in my wife's maiden name. Our house, which still has a mortgage is under both of our names. I just would like to know the tax implications of of owning this property which we plan to rent out and maybe sell in the future.

rent - the property is only in your wife's name therefore there is no "we" in rent out, there is only she will rent it out and only she will be liable for income tax on her rental profits. If you wish to share some of the profit you will need to be made an owner of it by gift from wife, which, given you are married, has no tax implications for that gift between husband and wife

CGT - MIL gift
was MIL living in the property for the whole time she owned it? Yes or no
if no then it was not an exempt transfer when she gave it to wife and therefore MIL should have paid any CGT due on the transfer using its then market value. If she did not, then she is guilty of tax evasion

CGT - when selling by "you"
as it is not the marital main home and has never been lived in by "you" (which in this context means the marital unit, ie both of you together since a married couple can only have 1 main residence between them) then your wife will pay CGT based on the gain in value between its market rent when she was given it by her mother and what she finally sells it for. Wife will have one personal allowance (currently £11,300) to offset against that gain. The residual gain will be taxed at (current rules) 18% and / or 28% depending on how much income wife has in the tax year of sale.

If wife makes you co-owner the gain will be the same figure but obviously split between you in accord with whatever share you each own - the default being 50/50. Obviously each person gets their own 11,300 allowance against their own share

if wife makes you a co-owner shortly before sale, HMRC may see that as done purely for tax avoidance reasons and so treat her as still being the solo owner. The gift to you would need to be a "reasonable (it's not defined) time before the sale.

IHT the transfer counts as a PET : potentially exempt transfer in respect of MIL's estate and possible inheritance tax position

care home - unless MIL dies before the money from her other house runs out then the gift of this house will be taken as being deliberate deprivation of capital intended to avoid care fees. In other words MIL will be treated as though she still had that money and therefore will not get the same level of council funding as if she genuinely never owned the property

SDLT - as a married "unit" "you" now own 2 properties. If you sell the marital home and buy another marital home that won't matter, but if you buy a third property without selling the martial home and therefore end up owning 3 properties you will pay the higher rate SDLT on the purchase price of the 3rd property

IHT - MIL has given away a property that she no longer lives in herself. As such the value of the gift is a PET and thus subject to the "7 year rule". If MIL dies before 7 years have passed from the date of the gift the value of the gift may be included in MIL's estate when totalling up how big her estate is. If you are unfamiliar with such a basic aspect of IHT can I respectfully suggest your MIL does her own tax planning for her own death.

Grandparents - presumably the same situation applied when GP gave their property to MIL. They were still alive at the time and may or may not have lived in the property. The tax implications of that are now presumably history since I assume GP are now dead?

BigTrev84 wrote: »

When the property was owned by wife's grandparents this was their only house. It was transferred to my MIL when they went into care. The care was paid out of savings. When her grandparents died she didn't live in this house as her other house was her main residency and it was never rented out.

so when MIL gives it to wife, the MIL will have to pay CGT on the gain between its value when she received it from wife's grandparents and its value when she gives it to wife

as both gifts were between relatives the values used must be realistic open market values. To get those retrospectively MIL may need to pay a professional valuer for advice as HMRC will check the values against its own records and woe betide MIL if they are hugely different.

since MIL never lived there then she cannot claim exemption and so only has her personal CGT allowance of 11,300 to offset against the gain. And before you ask if we assume MIL is still married then no she cannot move in now and claim exemption since a married couple can have only one exempt main home

and as mentioned in #2, the transfer will also be a deprivation of capital for care home fee purposes so a double whammy. Pay actual tax on the transfer and yet still be classed as owning the property and having all that money anyway