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  • FIRST POST
    • MB1972
    • By MB1972 5th Dec 17, 8:06 PM
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    MB1972
    Avoiding CGT and inheritance tax
    • #1
    • 5th Dec 17, 8:06 PM
    Avoiding CGT and inheritance tax 5th Dec 17 at 8:06 PM
    Hi,

    I have an interesting situation which I will try to explain.

    My parents in law have been offered a significant amount of money for their property by their next door neighbours above the market value. Their plan is to knock down both properties and build multiple homes on the 2 sites, it is likely this will get planning permission as similar has already been done a number of times in the road. The complication to this is that my father in law would like to buy/own one of the new homes on the plot once his has been removed. He would like at the same time to avoid future inheritance tax and we can assume that one of my parents in law will live more than 7 years so gifting is an option. To further complicate things my wife and her sister were left 25% of the property by their grandmother (original owner) to be realised on sale of the property, so my parents in law only actually own 50% of the property.

    After reading extensively about pitfalls such as GWR, POA, and ignoring the obvious issues like where does he live in between ,getting a proper valuation, families falling out and divorce. I have come up with a way to possibly avoid CGT on the sale of the property and also stay within the IHT threshold assuming they live for a further 7 years.

    My idea is this.
    The existing property is sold for less than the offer, offset by the value of the new property he will take on, but he buys the new property for a nominal amount of £1 so a transaction has taken place. i.e. he is offered 1 million for his property, the new property will have a market value of 400K therefore he sells his current property for 600K and buys the new property for £1. My parents in law would then live in the new property which would be below the 1 million threshold for joint couples due by 2020 and he would leave the new property in his will to my wife and her sister. The 600k he sold the home for would be subject to CGT by my wife and her sister for their share. This is not likely to be much more than the property was worth when it was bequeathed and their grand mother died so hopefully would be minimal. My father in law would then gift the remaining money to my wife and her sister less any money he wants to retain.

    He would effectively end up with a new house as his main residence, my wife and sister would receive their money tax free, avoiding a significant CGT payment.

    Any thought welcome as this is not a simple topic!
    Last edited by MB1972; 05-12-2017 at 8:07 PM. Reason: correction
Page 1
    • Keep pedalling
    • By Keep pedalling 5th Dec 17, 8:11 PM
    • 4,061 Posts
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    Keep pedalling
    • #2
    • 5th Dec 17, 8:11 PM
    • #2
    • 5th Dec 17, 8:11 PM
    What makes you think he and his neighbour would want to get involved in a complex tax fraud?
    • G_M
    • By G_M 5th Dec 17, 8:24 PM
    • 42,229 Posts
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    G_M
    • #3
    • 5th Dec 17, 8:24 PM
    • #3
    • 5th Dec 17, 8:24 PM
    What makes you think your wife and her sister would want to get involved in a complex tax fraud?
    Originally posted by Keep pedalling
    .................................................. ..............
    • Pixie5740
    • By Pixie5740 5th Dec 17, 8:44 PM
    • 11,196 Posts
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    Pixie5740
    • #4
    • 5th Dec 17, 8:44 PM
    • #4
    • 5th Dec 17, 8:44 PM
    A plan so cunning you can stick a tail on it and call it a weasel!
    Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.
    • Alarae
    • By Alarae 5th Dec 17, 8:54 PM
    • 282 Posts
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    Alarae
    • #5
    • 5th Dec 17, 8:54 PM
    • #5
    • 5th Dec 17, 8:54 PM
    Also you should note that HMRC can link transactions if they think a transaction had been set up artificially for the sole purpose to avoid tax.

    So I highly doubt they will let the £1 house thing go, as you are avoiding stamp duty there as well. If it's clear to a layman what you are doing to avoid tax, you can get that HMRC gets it too.
    • Pixie5740
    • By Pixie5740 5th Dec 17, 8:58 PM
    • 11,196 Posts
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    Pixie5740
    • #6
    • 5th Dec 17, 8:58 PM
    • #6
    • 5th Dec 17, 8:58 PM
    In all seriousness my advice to your in laws would be to seek tax and estate planning advice from a professional tax advisor.
    Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.
    • getmore4less
    • By getmore4less 5th Dec 17, 9:00 PM
    • 30,732 Posts
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    getmore4less
    • #7
    • 5th Dec 17, 9:00 PM
    • #7
    • 5th Dec 17, 9:00 PM
    To further complicate things my wife and her sister were left 25% of the property by their grandmother (original owner) to be realised on sale of the property, so my parents in law only actually own 50% of the property.
    Start here were there any lif interests involved?
    • MB1972
    • By MB1972 6th Dec 17, 7:58 PM
    • 4 Posts
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    MB1972
    • #8
    • 6th Dec 17, 7:58 PM
    Life interest trust
    • #8
    • 6th Dec 17, 7:58 PM
    Thanks for your reply, and we will of course be taking professional tax planning advice anyway.

    My wife's grandmother did indeed set up a life interest trust,

    It states my father in law is the life tenant and 50% of the property passes to his wife (my mother in law), My wife and her sister will get 25% of the property each.

    I would be interested to know how this affects the sales of the property from a CGT and IHT perspective.
    • getmore4less
    • By getmore4less 6th Dec 17, 8:34 PM
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    getmore4less
    • #9
    • 6th Dec 17, 8:34 PM
    • #9
    • 6th Dec 17, 8:34 PM
    You will still need to check the details but the following is a possibility

    check it is a qualifying life interest, did it pass through a will on death or before 2006?

    if it is it should be as if the FIL owns the lot so CGT should get the full PRR which solves one issue.

    the terms of the trust will need checking on exactly what options are available. are sale/purchases in the terms can funds be distributed or does it need dissolving etc.

    any gift from the trust being dissolved becomes a PET subject to the usual issues.


    As the house did not come with any nil rate band and on death of FIL the kids get 1/2 that would use up his NRB leaving the MIL with 1/2 the house and oly one and a bit NRB if not all used up.

    Getting the kids shares out of the trust and past the 7y might be very beneficial all round.

    All with nothing dodgy.

    get it looked at as a very high priority if this place is worth £1m
    • steampowered
    • By steampowered 6th Dec 17, 9:53 PM
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    steampowered
    My amateur understanding is that Capital Gains Tax is charged on the consideration received for the property.

    This does not have to take the form of cash. It could take the form of other assets.

    In your example, in exchange for the property he is selling, your father would receive £600k in cash plus a new property worth £400k. I suspect that the total value for CGT purposes would still be £1 million even though only part of it is being paid in cash. I don't think you are actually saving CGT.

    I don't know whether your proposal would save SDLT.

    As this is a slightly unusual situation, and as it sounds like a substantial amount of capital gains tax could be payable, I think it would be a good idea to get professional advice. A few hundred quid for a bit of sensible advice from an accountant or a tax adviser would be well worth it given the amounts involved.
    • 00ec25
    • By 00ec25 6th Dec 17, 10:05 PM
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    00ec25
    My amateur understanding is that Capital Gains Tax is charged on the consideration received for the property. no, it is based on the gain in value,
    hence it's called capital Gains tax, and that tax is levied on the disposal of an asset - ie a change in its ownership


    This does not have to take the form of cash. It could take the form of other assets. it takes the form of market value, not the cash changing hands in the context of a connected party transaction

    In your example, in exchange for the property he is selling, your father would receive £600k in cash plus a new property worth £400k. I suspect that the total value for CGT purposes would still be £1 million even though only part of it is being paid in cash. I don't think you are actually saving CGT.

    I don't know whether your proposal would save SDLT. SDLT is the tax that is based on consideration, but again in the context of this post entailing exchange of property there are very specific rules over how SDLT would be calculated

    As this is a slightly unusual situation, and as it sounds like a substantial amount of capital gains tax could be payable, I think it would be a good idea to get professional advice. A few hundred quid for a bit of sensible advice from an accountant or a tax adviser would be well worth it given the amounts involved.
    Originally posted by steampowered
    it will be essential for you to get professionally qualified tax advice is the technically sound content of the above advice
    Last edited by 00ec25; 07-12-2017 at 10:09 AM.
    • G_M
    • By G_M 6th Dec 17, 10:06 PM
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    G_M

    In your example, in exchange for the property he is selling, your father would receive £600k in cash plus a new property worth £400k. I suspect that the total value for CGT purposes would still be £1 million even though only part of it is being paid in cash. I don't think you are actually saving CGT.
    Originally posted by steampowered
    I suspect the intention is to 'hide' the £400K new property from HMRC when making the CGT declaration.
    • steampowered
    • By steampowered 6th Dec 17, 11:21 PM
    • 1,945 Posts
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    steampowered
    it will be essential for you to get professionally qualified tax advice is the technically sound content of the above advice
    Originally posted by 00ec25
    The point I was making is that the value of an asset for the purposes of calculating the disposal value is not simply the cash value ascribed to the property purchase agreement. I didn't feel the need to point out that CGT is charged on gains (though that is of course true).

    The sale to the neighbour envisaged by the Op is not a connected party transaction. A next door neighbour is not a category of connected person for the purposes of s286 of The Taxation of Chargeable Gains Act 1992.

    I agree on the need for the Op to take professional advice.
    Last edited by steampowered; 07-12-2017 at 9:36 AM.
    • getmore4less
    • By getmore4less 7th Dec 17, 6:26 AM
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    getmore4less
    The trust status need sorting first.
    • MB1972
    • By MB1972 7th Dec 17, 9:31 AM
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    MB1972
    In summary
    Thanks for all the advice and suggestions, it has certainly helped clarify a few things.

    We had already decided to take advice before the posting so that was never an issue.

    It looks like possibly dissolving the trust and using PET will be the wAy to go. We may retain a plot of land in the sale and then fund the cost of the new property from the proceeds to avoid stamp duty The actual value is 1.5 million so well above IHT even in 2020.

    I will post back once we have had advice in a few weeks.
    • getmore4less
    • By getmore4less 7th Dec 17, 10:15 AM
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    getmore4less
    £1.5m needs some serious IHT planning, quite surprised this has not been done already as it is needed when, as a couple, you approach £650k.
    • Chappers27
    • By Chappers27 7th Dec 17, 10:21 AM
    • 58 Posts
    • 58 Thanks
    Chappers27
    Just don't do it. It sounds messy and complicated, which means the result will be messy and complicated. If you have to 'come up' with a solution, there's always a problem.
    • Mgman1965
    • By Mgman1965 8th Dec 17, 11:41 AM
    • 68 Posts
    • 65 Thanks
    Mgman1965
    Sounds like another of those "can I give my elderly mother the money to buy her heavily discounted LA house for cash, who then sells/rents it to me for a £1".
    • theartfullodger
    • By theartfullodger 8th Dec 17, 11:50 AM
    • 9,101 Posts
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    theartfullodger
    Paying taxes is the "greatest form of patriotism"
    • Gabbs the Newt
    • By Gabbs the Newt 8th Dec 17, 11:51 AM
    • 2 Posts
    • 1 Thanks
    Gabbs the Newt
    Paying taxes is the "greatest form of patriotism"
    Originally posted by theartfullodger
    So no ISAs, or pensions for you then? I simply don't believe you.
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