Capital gains tax relating to possible house sale

4richa4pora

My wife and I own our main residence.

I have owned a second house since it was gifted to me by my parents 15+ years ago.

My parents both continued to live in the house rent free, but both are now deceased.

IHT tax liabilities on a 'gift with reservation' and the estate have been sorted.

Moving my family into the house and living there for a few years is not an option.

The house remains furnished so I am paying a slightly reduced council tax.

So I now own a house which is not my main residence, and ideally wish to sell (or gift) it to one of my sons, with the other son to benefit from 50% of the proceeds from sale or to receive an equivalent cash gift.

I understand that selling OR gifting the house to my sons would incurr immediate CGT liabilities.

House was valued as £60000 on initial gift and is now £160000. So I am looking at a possible £100,000 gain over the 15 years.

Either son is willing to buy the property or to a 50% benefit of proceeds.

Both sons currently live in our family home and are in their mid 20s.

Neither my wife or myself used our CGT allowance for the last or this year. Does CGT allowance carry forward for twelve months?

If I were to transfer 50% ownership of the property to my wife, then presumably we could benefit from 2- 4 lots of CGT allowance at sale, but, would the costs of doing this cancel out the CGT savings?

Would I need a HIP for this intra family transfer?

The stamp duty holiday is probably a good thing for us.

But I am probably looking at a £100,000 gain for CGT purposes over 15 years.

What is the best way of getting a legal, but 'lowest possible current' valuation?

If we created a longish term tenancy for one or both of my son's, where they had a rental agreement and paid for the rental at market rate, would this reduce the value of the property when it was gifted to them or sold further down the line?

Is setting up a rental agreement expensive?

Or what is the most CGT efficient way of dealing with the situation?

Or have I missed something really simple?

Thanks very much for any advice you are able to offer.

silvercar

A lot of questions. I'll make a stab at some and leave others to comment further.

4richa4pora wrote: »

My wife and I own our main residence.

I have owned a second house since it was gifted to me by my parents 15+ years ago.

My parents both continued to live in the house rent free, but both are now deceased.

IHT tax liabilities on a 'gift with reservation' and the estate have been sorted.

Moving my family into the house and living there for a few years is not an option.

The house remains furnished so I am paying a slightly reduced council tax.

So I now own a house which is not my main residence, and ideally wish to sell (or gift) it to one of my sons, with the other son to benefit from 50% of the proceeds from sale or to receive an equivalent cash gift.

I understand that selling OR gifting the house to my sons would incurr immediate CGT liabilities.

House was valued as £60000 on initial gift and is now £160000. So I am looking at a possible £100,000 gain over the 15 years.Was the 60k valuation as an empty property or with tenants paying no rent? I do worry that, if you used the former valuation the situation may be worse. The true starting point is the value with your parents living there. Posts on this board by jimmo will help you further.

Either son is willing to buy the property or to a 50% benefit of proceeds.

Both sons currently live in our family home and are in their mid 20s.

Neither my wife or myself used our CGT allowance for the last or this year. Does CGT allowance carry forward for twelve months?No

If I were to transfer 50% ownership of the property to my wife, then presumably we could benefit from 2- 4 lots of CGT allowance at sale, but, would the costs of doing this cancel out the CGT savings?You could even also transfer a third to a son

Would I need a HIP for this intra family transfer?No

The stamp duty holiday is probably a good thing for us.

But I am probably looking at a £100,000 gain for CGT purposes over 15 years.

What is the best way of getting a legal, but 'lowest possible current' valuation?In the present market? Call in a few EAs and ask them the price for a quick sale.

If we created a longish term tenancy for one or both of my son's, where they had a rental agreement and paid for the rental at market rate, would this reduce the value of the property when it was gifted to them or sold further down the line?I doubt it would count as a market value transaction if the tenant was the buyer and was your son.

Is setting up a rental agreement expensive?No, download a free AST from one of the landlord websites.

Or what is the most CGT efficient way of dealing with the situation?Theoretically you could transfer 10% of the property every year for the next 10 years?

Or have I missed something really simple?

Thanks very much for any advice you are able to offer.

4richa4pora

Thanks for taking the time to reply silvercar. I am a near total CGT newbie and realise that I have a lot of questions, but I really appreciate the clarity you have already brought to the situation! I will almost certainly need the services of a legal/financial professional further down the line to put pen to legal paper, but I always like to have things reasonably clear in my mind before seeking this out.

Was the 60k valuation as an empty property or with tenants paying no rent? I do worry that, if you used the former valuation the situation may be worse. The true starting point is the value with your parents living there.

I fear the initial £60,000 valuation may have been the value with vacant possession, which probably makes the situation worse. But my current valuation is almost certainly high under current conditions. A check today of the recent prices that similar houses on the same estate have actually sold for recently (using http://www.nethouseprices.com/ ) shows £130,000.

Posts on this board by jimmo will help you further

.
I will search out jimmo's posts - thanks for the pointer.

Let's assume for the purposes of calculation that the real initial value of the house was £40,000 and that we have seen a gain of £100,000.

1. I assume that the new 18% flat rate has removed any 'retrospective' allowances such as indexation etc which existed for some in the past. Is this correct?

2. Is the maximum CGT payable if I sold/gifted the entire house immediately £100,000 - £9600 = £90,400 *18% = £16272 payable (after this year's annual CGT allowance)?

3.

You could even also transfer a third to a son

I don't quite follow this. If I gave a third of the house to a son, would I not be realising an immediate £100,000 / 3 = £33,333 of a gain. Which after deducting £9600 annual allowance would leave me to pay 18% CGT on the remaining 23,733 ie £4271 tax payable?

Is the following correct?

4a. If I transferred 50% of the property to my wife, then would we each be carrying (before annual allowance relief) a potential £50,000 of gains on a future gift/sale?

4b. If after doing this 50:50 split we individually transferred just under £13,400 of the 'total property value' this year (and similar 'adjusted' amounts each subsequent year) then would this £13,400 be 'realising' an immediate capital gain of £13,400 /(100,000/140,000) = £9571 (ie below our individual CGT annual allowance)?

4c. If so, could we therefore transfer a total of £26,800 of 'total property value' each year to a son until the total £140,000 has been transferred over. ie 6 years approx.without paying any CGT (assuming no detrimental changes in the law, and no increase in the value of the property)?

I know that answering complex questions and following another person's calculation takes a lot of time, so would fully understand if you tell me that NOW is the time to seek out concrete legal/financial advice. THANKS EITHER WAY!

jimmy230

I'll have a go at answering what I can:

1. Since the start of the tax year the indexation allowance and taper relief have been abolished.

2. Provided your figure re the gain is correct, then you have correctly calculated the CGT due

4. You can make a gift to your wife without triggering liability for CGT (provinding you are legally married, i.e. not common law husband and wife), it would therefore be sensible to transfer up to 50% of the property to her (if you are happy to do this) as you would then have two annual exemptions to set against the gain.

Providing that you do not need to sell the property immediately, then you and your wife could transfer a set amount to your sons ensuring that the value of the disposal falls below the annual exemption. N.b you would have 2 x annual exemptions if you transferred up to 50% to your wife.

You mentioned letting out the property, remember here that you will be liable to pay income tax on the rent received - potentially another good reason to gift part of your property to your wife, if she pays income tax at a lower rate than you.

4richa4pora

Thanks Jimmy230 - your assistance is appreciated!

My only reason for letting the property would be to decrease its value, but I would only have done this to one of my sons, and it seems doubtful that this would count as a market value transaction if the tenant was the buyer and was a son. (silvercar's perception)

From the advice so far it seems that the following may be the best option, but there may be other as yet previously unknown alternatives.

1. An immediate 50% house gift to my 'legally married to me' wife,

2. For us to then individually arrange a rolling annual gift (or annual purchase by a son) of a sufficient share of the property to max out both of our annual CGT allowances.

I need to balance out the savings from the above against the complexity and possible/probable costs of :
Land Registry fees for the initial 50% transfer to my wife?
Legal Fees for arranging the initial 50% transfer to my wife
Legal Fees for creating the rolling annual transfer agreement.
Land Registry fees throughout the rolling transfer period?
Legal Fees throughout the rolling transfer period?
Possible Stamp Duty, which might arise outside the stamp duty holiday?
Possible legal fees for creating any possible tenancy agreement with the son during the entire roll over period.

To me as a 'CGT novice' this begins to sound rather complex, and complex often means 'expensive', but unless Forum Members suggest alternatives I think that the above will be a very useful way of commencing discussions with our solicitor.

Thanks!

silvercar

Obviously fees will vary by who you employ and whereabouts in the country you are etc

Land Registry fees for the initial 50% transfer to my wife?
Legal Fees for arranging the initial 50% transfer to my wifeDo these two together. With no mortgage, you may not even need a solicitor, the land registry can help you with forms. If you do need a solicitor the cost could be a few hundred pounds.
Legal Fees for creating the rolling annual transfer agreement.Not sure that this wouldn't look like tax evasion and there is the risk that creating the contract triggers a liability. You could just do the transfer every year without a contract.
Land Registry fees throughout the rolling transfer period?
Legal Fees throughout the rolling transfer period?Again you may not need a solicitor, particularly when you have seen the completed forms for one year and are repeating them the next year.
Possible Stamp Duty, which might arise outside the stamp duty holiday?Not if you are transferring less than £125k.
Possible legal fees for creating any possible tenancy agreement with the son during the entire roll over period.Download a template from a website. Actually you don't need an agreement per se if you trust your son. The fact that (a) he lives there and (b) you recive rent creates a tenancy.

There are inheritance tax issues and care home cost issues if you or your wife don't survive 7 years after the gift was made or need to go into care within a few years of making the transfer. Without knowing your age and health I don't know if this is relevent.

4richa4pora

Thanks again silvercar. Things are becoming clearer! I cannot explain just how important the 'perceptions' I receive from you and others are to us. I actually managed to sleep for most of the night as the mists began to clear.

My wife and I are in our mid 50s and to date are unaware of any life threatening illnesses..

Re: IHT and wills - My wife and I did have mirror wills which created a Discretionary Will Trust (using the IHT allowance) on first death, and then left any excess to the surviving partner. I believe that recent changes mean that for IHT purposes there is no need for a Discretionary Trust as IHT allowances can now be combined on second death, but I have yet to decide about planning for possible care home fees. We therefore plan to have new wills created once this house situation has been sorted.

Back to the house situation.

Land Registry fees for the initial 50% transfer to my wife?
Legal Fees for arranging the initial 50% transfer to my wife.
Do these two together. With no mortgage, you may not even need a solicitor, the land registry can help you with forms. If you do need a solicitor the cost could be a few hundred pounds.
I will explore the 'Land Registry' situation later today. I hadn't thought that dealing direct might be possible.
Legal Fees for creating the rolling annual transfer agreement.Not sure that this wouldn't look like tax evasion and there is the risk that creating the contract triggers a liability. You could just do the transfer every year without a contract.
Now that IS very interesting - so provided that my wife and I (individually) created a piece of paper for each annual transfer (up to the CGT allowance for that year) at the time of transfer and had that signed and dated by the giver, the receiver and possibly an independent witness, that would be OK?
Land Registry fees throughout the rolling transfer period?
Legal Fees throughout the rolling transfer period?
Again you may not need a solicitor, particularly when you have seen the completed forms for one year and are repeating them the next year.
Good news again. I will check for complexity of the form.
Possible Stamp Duty, which might arise outside the stamp duty holiday?
Not if you are transferring less than £125k.
Does this mean £125,000 (currently £175,000 due to Stamp Duty Holiday) at any one time then? If not, then at what stage would any stamp duty be payable as the property is almost certainly worth over £125,000 and we would be transferring it in installments?
Possible legal fees for creating any possible tenancy agreement with the son during the entire roll over period.
Download a template from a website. Actually you don't need an agreement per se if you trust your son. The fact that (a) he lives there and (b) you recive rent creates a tenancy.
I have total trust in both my sons, and would be gifting money to the second son throughout to keep things equitable. But I could download a tenancy agreement form. Is it essential that my son actually pays rent for his unowned share, and if so does this have to be at market rate?

THANKS AGAIN!

silvercar

I will explore the 'Land Registry' situation later today. I hadn't thought that dealing direct might be possible.

Apparently (I've not had need to use them), they are very helpful over the phone and can send you the necessary forms.

Now that IS very interesting - so provided that my wife and I (individually) created a piece of paper for each annual transfer (up to the CGT allowance for that year) at the time of transfer and had that signed and dated by the giver, the receiver and possibly an independent witness, that would be OK?

You would want the property registered with the land reg, or some other legally valid document, in the correct ownership ratios. Personally I would want to run it past a solicitor at least for the initial transaction. Presumeably the intention is to remove the property from your estate, you don't want to do it wrong and the transfer not be accepted.

Does this mean £125,000 (currently £175,000 due to Stamp Duty Holiday) at any one time then? If not, then at what stage would any stamp duty be payable as the property is almost certainly worth over £125,000 and we would be transferring it in installments?

This is one of the reasons you may be better off without an agreement to transfer chunks each year. As a stand alone transfer, if its below the threshold there is no stamp duty.

Is it essential that my son actually pays rent for his unowned share, and if so does this have to be at market rate?

Not sure on the income tax front. If you receive rent you will have to declare it for tax. If you don't receive rent I'm not sure if that triggers any problems.

I should mention that doing the transfer over a period of a few years increases the risks of something going wrong in the interrim eg someone needing care while still part owning the house. You may want to consider what you would do if your son wanted to sell the house before you have passed full ownership to him.

There are always complications that could occur but would be statistically unlikely eg if your son needed care or even pre-deceased you while part owning the property.

4richa4pora

Thanks silvercar.

Like you, I think it may be wise to now seek some 'professional' advice to ensure that:
a. a 50% transfer to my wife, with her immediately gifting up to her annual CGT allowance is OK taxwise.
b. annual 'officially unplanned' transfers up to our CGT limits will be treated as genuine transfers for CGT purposes.
c. annual 'officially unplanned' transfers will be accepted as a genuine means of transferring the house out of our estate.
d. the precise position over stamp duty is clarified
e. the appropriate processes are actioned using the most appropriate methods..

I may actually purchase an hour or so from a local recommended tax accountant before moving on to my solicitor.

I thank you all for the advice, I started off as a CGT novice, but feel that I am now more than adequately equipped to at least set the ball rolling with the professionals.

I notice that the Nationwide is suggesting that house prices may see a 25% decline from peak to trough. Strange as it seems, this may be a good thing for me, as I am not intending selling to a third party, but transferring ownership within my family. So the potential CGT bill may be decreasing as we speak.

If I discover anything by the end of this process which contradicts any of the above I will post it for the benefit of others.