CGT/IHT/GWR applies to property sale?

Sam9999_2

I was wondering if any few of you Inheritance Tax/Capital Gains Tax experts out there could give me some advice on my situation.

My Dad "gifted" me his flat 21 years ago by transferring the deeds into my name - BUT continued to live there until he passed away earlier this year. I have never lived in the flat. I have now sold the flat for £200k. I was wondering whether this would come under IHT or CGT as far as HMRC is concerned.

As my Dad continued to live at the flat after giving me the deeds ownership, would it not be classed as a "Gift With Reservation" by HMRC right up until the date when my Dad lived there, and hence only regarded as my asset when he ceased living there?

Do I then only have to pay CGT from the date when he no longer lived at the house earlier this year? As the value of the flat would not have risen so much in the few months up to when I sold the flat, does that mean I face a much smaller CGT bill than I had originally been expecting (before I found out about the Gift With Reservation rule), i.e from when my Dad actually gifted me the flat 21 years ago!

Or would this fall under IHT as I have in effect inherited the flat afer his death? But then it is under the threshold for IHT isn't it? He didn't leave me anything else, so is there maybe no IHT liability?

If, on the other hand, I DO have to pay CGT (really hope not!) over the 21 year period, could any one give me a very rough estimate of what the CGT would be?

Also with regard to informing HMRC about this, I am obliged to tell them by a certain deadline or will they automatcally calculate it from the official records?

Any replies are much appreciated. Thanks.

silvercar

A good starting point is here:

http://www.hmrc.gov.uk/CTO/customerguide/page6.htm#5

In particular,

"What is a gift with reservation?
A gift which is not fully given away is known as a gift with reservation of benefit.
Where gifts with reservation were made on or after 18 March 1986, we can include the assets as part of your estate but there is no seven year limit as there is for outright gifts. "

and,

"received a gift with reservation of benefit from someone and they die after making the gift, you should tell us about it within one year of death.
Although you do not have to tell us about potentially exempt gifts or gifts with reservation of benefit at the time they are made, all gifts that are chargeable to inheritance tax because of the donor's death must be reported to us after the donor has died."

Sam9999_2

Thanks for your replies. They may make depressing reading for me this morning, but at least I can now prepare for the worst!

Regarding IHT in my case, would I not be exempt as I didn't get anything else from my Dad (no value estate) other than the flat. The value of which is under the nil rate band for IHT isn't it?

Is there not an anomoly here in the case of HMRC getting both CGT and IHT from GWR rules ? For e.g, if the flat had been worth £1m, the Gift with Reservation rule says the HMRC can treat the property as if it had never been gifted away in the first place, and hence I would have been facing a hefty IHT bill.

However, with CGT, they treat the property as though it was my asset from the moment the gift was made!

So is the HMRC not guilty here of "getting it both ways" here by on one hand saying the flat was effectively still my dad's asset when he was living there for IHT purposes, but for CGT they can say the asset was effectively mine when he gifted it! Is that not having your cake and eating it?!

Thanks again for any comments.

CLAPTON

Whether IHT is payable depends upon the value of your father's total estate plus gifts with reservations and not on how much you personally received (unless thats the same things of course).. if the total estate was 200k (including the flat) then there would be no IHT to pay.

silvercar

Sam9999 wrote: »

Thanks for your replies. They may make depressing reading for me this morning, but at least I can now prepare for the worst!

Regarding IHT in my case, would I not be exempt as I didn't get anything else from my Dad (no value estate) other than the flat. The value of which is under the nil rate band for IHT isn't it?

Is there not an anomoly here in the case of HMRC getting both CGT and IHT from GWR rules ? For e.g, if the flat had been worth £1m, the Gift with Reservation rule says the HMRC can treat the property as if it had never been gifted away in the first place, and hence I would have been facing a hefty IHT bill.

However, with CGT, they treat the property as though it was my asset from the moment the gift was made!

So is the HMRC not guilty here of "getting it both ways" here by on one hand saying the flat was effectively still my dad's asset when he was living there for IHT purposes, but for CGT they can say the asset was effectively mine when he gifted it! Is that not having your cake and eating it?!

Thanks again for any comments.

Totally agree. It is called bad tax planning, though to be fair the tax regime when you make your plans may not be the same as those that are in place when your plans come into effect. There may have been other reasons for the transfer eg to avoid the possibility of selling the property to pay care costs.

If your Dad took professional advice in transferring his home to you, then I would be inclined to go back to that advisor and ask for his help in sorting it out. If he transferred it to you without taking advice then you just have to make the best of a bad job.

Was your Dad's total estate less than the IHT limit? If so then there will be no IHT to pay.

For a CGT calculation, you need to find the value of the property when it was transferred to you. From there you reduce the value to reflect the fact that your father lived there rent free and then calculate the gain you have made.

silvercar

According to the Nationwide house price index, a property sold now for £200k would have been worth about £54k in 1987. (This is just to give you an idea, obviously different areas have had different rates.)

If you knock off a third of that value to allow for your Dad's lifetime right to live there rent free, (there are acturial tables that can calculate this sort of thing), then your starting point is £36k.

So the gain is 200-36=164k less selling and transfer costs, say 4k =£160k. You have a CGT allowance of £9,600 if not used elsewhere, so that reduces the £160k to £150.4k.

CGT on £150.4k @ 18% = £27k approx.

Having sold in the tax year 2008-09 the tax becomes due by end of January 2010, so you have some time. If you pay early, the IR will pay interest on the amount due, so that could help reduce the bill (and be a safe haven for it).

ceeforcat

Something not covered in replies to date:

Was your father a dependent relative? If so, the house would be exempt from CGT if purchased before 5th April 1988.

No-one seems to have mentioned this. Maybe you are all too young?

silvercar

ceeforcat wrote: »

Something not covered in replies to date:

Was your father a dependent relative? If so, the house would be exempt from CGT if purchased before 5th April 1988.

No-one seems to have mentioned this. Maybe you are all too young?

Nice to be able to claim to be too young!

Good point ceeforcat.

So the question is was your father infirm or elderly in April 1988. Digging around on the net and you find that elderly equates to over 65 and infirm as being over 55 and unable to work again.

Sam9999_2

Thanks Ceeforcat! The Dependent Relative clause could be my saviour! My Dad was indeed over 65 in 1988 and was living there as his only residence (and continued to do so).However this is becoming a CGT rollercoaster for me as I've checked my papers and, would you believe it, my Dad actually gifted me the flat in 1989 - not in '87 as I had recalled. At first I was gutted that I seem to have missed out by 1 year, but maybe I still have hope after doing some more web digging!

Ceeforcat, you said the flat would be "exempt from CGT if PURCHASED before 5th April 1988". However, the HMRC website only refers to whether RESIDENCE was acquired before 1988, and does not seem to deem the date of OWNERSHIP as the critical criterion.

http://www.hmrc.gov.uk/manuals/CG4manual/cg65550.htm

Indeed, I did some further web digging, and discovered a case similar to mine on the BBC website, where an eminent accountant advised that you would be CGT exempt as long as your dependent relative was living at the property before '88 - even if you were gifted property AFTER '88!

http://news.bbc.co.uk/1/hi/business/4082541.stm


I am right in thinking I am in this category or is my personal tax rollercoaster not yet over?! Big thanks again to anyone who can clear this up!

Sam9999_2

jimmoI hate to be the bearer of bad tidings but I am afraid that won’t work for you.
That article on the BBC was written in December 2004 and the parent had transferred the property “8 years ago.” So that was 1986.

---

Hi Jimmo. You may be right overall but, erm, I think 8 years before 2004 is 1996 - not 1986! At least I don't feel as bad now about initially working out 1989 as being 21 years ago from now!:beer:

As the individual on the BBC website was gifted the property in 1996, the advising accountant seems to think the property is CGT exempt solely on the basis of the dependent relative living there before '88. As we have proven, maybe we are all capable of mistakes!

Once again, big thanks to anyone who can clear this up.

Sam9999_2

Thanks Jimmo for your in depth analysis. Yes it does look like you are indeed right, but where there's doubt there's still some hope for me to avoid the dreaded CGT bill - at least until someone in the know here definitely says I won't be exempt!

Two things that give me some hope are:

1) If I hadn't read the BBC article where the head of taxation at the Association of Chartered Certified Accountants had not advised someone in the same position as me that they would be exempt from CGT, then I don't think I'd have any hope at all!

The person in the BBC report had inherited his relative's house after 1988, and yet the accountant reckoned he may be CGT exempt as long as the dependent relative was in residence at the property before 1988. Perhaps the accountant used the word "may" be exempt as he wasn't sure whether the enquirer's relative qualified as a Dependent Relative, as it is not clear in the report about the relative's age at the critical 1988 date.

2) As you have pointed out, it is not 100% clear from the HMRC or the OPSI rules that someone who is gifted a flat from a dependent relative after 1988 cannot be CGT exempt. The rules say rather ambiguously (at least to me!) that residence "must be acquired" before 1988 - BUT BY WHOM?!

If they are referring to the dependent relative, then yes, my Dad had acquired residence before then. But if they are referring to the present owner, no I didn't acquire the residence before '88.

Can anyone shed any more light on this please, as Jimmo is right - I do not have the money to pay a high-flying team of accountants to fight this out for me with the HMRC. Of course, I would've had the funds if I'd been a money-grabbing so-and-so 19 years ago and turfed my Dad out on the streets, thus burdening the taxpayer with finding him a home, and pocketed 19 years of rent instead! :mad: Thanks.