Help! Is capital gains tax payable

Mummy_to_Lily

Hi there, this is my first post so please forgive me for diving straight in with a complex CGT question, also for the length of the posting. Unfortunately time isn't on our side and I need some quick, initial advice/thoughts on this situation.

Last week my Mum received a tax return out of the blue to cover 2005/06.

There are only 2 triggers I can think of that could have triggered the tax return.

a) She became 60 years old in that tax year and she started receiving state pension, along with already receiving a small widows pension and a salary from her job (tax office fully aware of this and if I remeber rightly were aware of all her earnings) .

b) She sold a 2nd property which was originally her marital home (detail below).

I am going on the assumption that the sale of the property has triggered the tax return......especially as it relates to 3 years ago.

I guess the easiest thing for me to do is outline a timeline of events which will hopefully make the situation easier to follow:-

1981 - Mum & Dad purchase house for c£10,5001988 - Mum & Dad separate (not divorce). Dad, Me & Brother continue to live in house. Mum continues to be joint owner as Dad can't afford mortgage alone.

1988 - Mum purchases a 50% share in 2nd property as 'tenant in common'. (Not sure if relevant, but 2nd Property cost c£25k + approx £45k spent on it for renovation/conversion).

1995 - Dad dies leaving a will to say he would like his estate to be split between me & my brother. However, because the will wasn't done properly and Mum & Dad were still legally married, everything automatically went to Mum. Deemed house value for probate in 1995 was £45,000. I continue to live in the house (rent free).

1998 - I move out. House empty for a while, then my brother moves in on and off over the couple of years (rent free).

2001 - Mum takes out a mortgage to renovate the house - Replace roof, Double glazing etc. Spent approx £10,000.

October 2001 - Rent it out at £550 per month. First 6 months tenant paid rent ok, then started experiencing problems with tenant. Long story short, tenant refused to pay rent, refused to hand back the keys etc etc. Turns out he was a professional 'bad tenant' ended off at a loss, took him to court etc etc - non of the rent was declared as income as Mum ended up worse off through having to pay solicitors fees trying to evict the tenant, recover unpaid rent and fees incurred in making good the damage the tenant had done. Finally got possession of the house back around May 2003.

2003 - Property up for sale 'as is', various attempts to sell fell threw.

2004 - Took property off market to renovate the house ready for sale again. New Kitchen, carpets & bathroom £5000 spent.

December 2005 - Finally completed sale of house for £125,000, however only received £123,000 proceeds as vendor decided to gazunder at the 11th hour and demanded £2k to perform minor decoration etc. Estate agents fees £2570 + solicitor £750.

Throughout 2003 - 2005 (sale) Mum had to pay full council tax on the property apart from the first 6 months.So I guess in essence, I need to know is whether there is any capital gains tax arising on the sale of the property.

Also where should we go from here? I'd also like to know the 'best' way to present this to the tax man in order to minimalise the tax liability. Can we 'roll over' any gain into her second house? If so, would it be more tax efficient? (The current value of 2nd property is about £180k).

She is a basic rate tax payer.

At this point I should also point out, after the fiasco with renting out the house, having a bad tenant, going to court and then having trouble selling the house, Mum wanted to put the house behind her and decided that she didn't want any reminders...she threw out most/if not all of the paper work (invoices, receipts, bank statements etc etc) to do with the house. She probably still has the probate stuff but that about it. We do however have pictures of the 'before' and 'after' of the house so we can demonstrate money was spent on the property to renovate it. Is this going to be a problem that she can't provide proof of expenditure?

Thanks in advance for ANY advice or guidance you can give, especially one that can give me a rough idea or the liability (if any) that would need to be paid.

fengirl_2

Very, very rough calculations:

Proceeds are 123000
less fees 3320
net proceeds 119680
Original cost half share 5520
Original probate value on dad's death 22250 (asuming 45k was the value of whole house)
Net gain 91,910
Exempt period last 36mths =36/months of ownership (you dont state month of purchase)
Exempt period during letting =19/months of ownsership
The net gain is then entitled to £40k relief as the property has been let. I would think a CGT liability is unlikely.

Need to know month of purchase to be of more help. I have not included cost of renovations as it is not clear what these were and you do not have invoices, so if challenged this may not stand up.
The details of mortgages and Council Tax are not relevent.
The only way you can present this to HMRC is on the CGT pages of the self assessment. It might be worth getting an accountant to do this as a one-off for your mother.

Mummy_to_Lily

Hi Fengirl - Firstly thank you so much for replying - I've been losing sleep because of worrying about Mum having a large tax bill!

In response to your questions/assumptions:-

1) The house was purchased in September 1981.
2) £45k was the whole probate value of the house in 1995.

Do you think it is likely the sale of the house is what has triggered the tax return for this particular year? It seems strange why they would send one now. The return was sent from East Kilbride - which I think is where pensions is dealt with, but is not her normal tax office.

Also, I forgot to mention that the overall net proceeds of the sale of the house after paying off the outstanding mortgage etc were then 'gifted' to me & my brother as Mum carried out my Dad's wishes of splitting the house/estate between us. Am I right in thinking there is no tax liability for us unless Mum dies within 7 years of gifting the money?

fengirl_2

Yes, HMRC receives details of property sales where the vendor was not resident and I think this has triggered the return. Did your mother decalre the letting income - - this will also need to be considered as she has put herself in prime position for an investigation - not least for not declaring the CGT on the sale.
There is never going to be a tax liability on you for receipt of the proceeds of the sale. IHT is payable by the executors of the estate, not indiviudal beneficiaries.
I think there may be a small amount of CGT and you should give this to an accountant for a one off piece of work.

Mummy_to_Lily

Thanks again Fengirl....I will certainly get on the case of finding a good Accountant to sort this mess out. At the time I did run it 'loosely' past someone who did say they didn't think there would be a liability (hence why nothing was declared to HMRC at the time). Also, the rental income wasn't declared to the HMRC because she ended up at a loss because of non-payment, solictor fees and 'making good' the damage by the tenant.

In addition to the reliefs you stated (last 36 months, the 19mths period of letting and the 40k letting relief) will she also be entitle to PPR relief being at it was her only home from 1981 - 1988?

Also, what about Indexation allowance and taper relief?

I think I understand the CGT rules (somewhat) however I was struggling with how to deal with the ownership commencing as a 50% share then becoming 100% share. As Mum 'inherited' the 2nd 50% share through spouse survivorship would the whole original cost reduce the gain?

I guess what I'm trying to acertain is the 'worse case scenario' of the tax liability....if you (or anyone else) could give me some sort of indication/ball park figure that would be great. I'd really like to understand the proforma of this calculation - I am an Accountant myself (hence the 'wanting to know') but this isn't my area, I do Company statutory accounts etc.

Thanks again.

Mummy_to_Lily

Based on the info I provided above...please can someone run their eye over my figures and see if I'm along the right lines or whether I've missed anything...much appreciated! :-)

123,000.00 Proceeds
(2,570.00) Agent
(750.00) Solicitor

---

119,680.00

(10,500.00) Original cost - 50% share (Sept 1982)
(22,500.00) Probate value - 50% (Feb 1995)

---

86,680.00 Unindexed gain

(10993.50) IA on cost 5250 x 1.047
(2407.50) IA on 50% probatecost 22,500 x 0.107

---

73,279.00 Indexed gain
(21,983.70) Less Taper relief of 30% (7yrs + 1yrs = 70%) (Apr 1998 - Dec 05)

---

51,295.30 Tapered Gain

(21,152.70) Less PPR (120 mths / 291 mths)


(2500.00) - improvements Double glazing estimate
(3500.00) - improvements Kitchen & Bathroom estimate

---

24,142.60
(8500.00) Less CGT allowance 2005/06

---

15,642.60 Overall gain



Therefore = Tax @ 20% £3,128.52

silvercar

Follow your calculation, just some points:

the indexation allowance on the original half: the rate is 0.987 for Sept 1982. This should uprate half the original value ie 5250 to 10,431.75.

on the other half the 22,500 half share uprates by 0.107 to 24907.50

Agree with the taper relief calc. (but figures slightly out due to the IA allowance correction needed.)

I think the PPR calculation is wrong. For the original half purchased there would be PPR releif as she did live in it as her home, so would get PPR relief for the time it was her home and the last 36 months of ownership. For the half she inherited, she never actually lived in it as her home during her period of ownership (though she did before she owned that half obviously). I'm therefore not sure if she would be eligible for PPR relief on the gain attributable to that half of the house.

The only comparison I can think of is when an adult inherits a home from a parent and rents it out. They are liable to CGT on all the gain with no PPR even if they lived in the house as a child ie to gain PPR relief you have to have lived in the property as your PPR while you have ownership.

I'm not an expert, happy to be corrected, just my take on it.

The PPR calculation would in any case need to be done separately for each half as the total months of ownership is different in both cases.

Also I think double glazing is a maintenance not an improvement, even if the glazing was previously single.

sdooley

I thought you took the annual allowance off before applying taper relief.

Plus as it's a late declaration there will be interest to pay and possibly penalties though if you do voluntary disclosure these won't be anything like the maximum of 100% of the tax.

localhero

sdooley wrote:

I thought you took the annual allowance off before applying taper relief.

No, there may be other disposals in the same tax year. Once the net gains after indexation and taper relief have been aggregated you deduct the annual exemption.

silvercar

The amount chargeable to tax, added to the amount earned in that tax year may take her into the 40% bracket for some of the amount.

Mummy_to_Lily

Thanks for all your help guys....much appreciated.

Also, am I right in thinking I can also deduct the mortgage interest throughout the period of the letting? Or am I getting confused about the relief available on the rental income?

Before contacting an Accountant I'm trying to gather as much paperwork/proof as I can and go fully armed. Although as I've said before, Mum threw most of the paperwork away so this is proving difficult.

I've written to the probate office today to get to get a copy of the letter of probate complete with the value of the estate on Dad's death.

The solictor that Mum used to deal with the house has now closed down due to the owner retiring - would a solicitor be required to keep their clients records for a period of time? only I think the mum's client file could hold some useful paperwork.

I've got a copy of the land registry, however it doesnt state the price Mum & Dad paid for the house - Any ideas how I can get confirmation of this? Also, obviously they would have incurred costs at the time of buying the property - what would be a reasonable amount (if any) to declare being as Mum can't remember what they had to spend to acquire the house?

Can anyone recommend a 'good' accountant in Hampshire? PM me with details please :-)