Capital Gains Tax on family home

high-tower_2

Hi,

After some advice on CGT.

My gran signed her house over to my uncle some years ago to protect her from being forced to sell it should she need to go into a care home, she unfortunately passed away saturday morning but her last wishes were for my uncle to split her estate 3 ways (i'm one of the 3), its not a big estate, only a small 2 bed bungalow worth maybe £120k but my uncle said this morning that he may get stung for CGT as he already owns a property,he is going to seek proper advice before he puts the property on the market.

Are there any loopholes on CGT that may help us as my gran & grandad spent all their lives working and paying taxes and then wanted to leave us all some money, it just seems so wrong that the government can get a share of the estate. I've looked at a few websites on it and its so confusing.

Any help would be appreciatted.

Thanks

Peter

CLAPTON

Its quite clear, if your uncle owns the property and does not live there as his principal private residence then the sale will be liable to capital gains tax.

What was the approximate value of the property when it was signed over to your uncle?

If he is married then it may be tax efficient to give half the house to his wife so her CGT allowance can be used.

ceeforcat

Clapton - there MUST be a reasonable time between a husband and wife transfer such as you suggest and the disposal of the property - if the HMRC believe that this was done solely for tax reduction reasons they will seek to ignore it. I had case recently where I advised a couple to do this but to obtain a formal valuation at the time of the transfer. It cost them £175 but ultimately saved them thousands when they sold the property a year later. The HMRC still investigated even though the lady had died - thankfully the documentation helped their case and no adjustment was made.

CLAPTON

ceeforcat wrote: »

Clapton - there MUST be a reasonable time between a husband and wife transfer such as you suggest and the disposal of the property - if the HMRC believe that this was done solely for tax reduction reasons they will seek to ignore it. I had case recently where I advised a couple to do this but to obtain a formal valuation at the time of the transfer. It cost them £175 but ultimately saved them thousands when they sold the property a year later. The HMRC still investigated even though the lady had died - thankfully the documentation helped their case and no adjustment was made.

Most interesting.

I have never heard of such a case; where there special circumstances?
Why would of a formal valuation at the time of transfer to the wife be needed.. it has no bearing on the tax situation?

johnllew

ceeforcat wrote: »

there MUST be a reasonable time between a husband and wife transfer such as you suggest and the disposal of the property

Why? What is your authority for this statement? AFAIAA, the transfer from H to W can take place immediately before the contract for sale takes place.

ceeforcat

O.K. – the incident was as follows:

Husband and wife operated a partnership from one business premises. However, property was in sole name of husband. Both retired and the question was whether or not to sell the property. They chose to rent it out instead (thereby losing all retirement reliefs but who listens to tax advisors?) A couple of years later their tenant ceases trading and they decide to sell it. Being aware of the anti-avoidance legislation I advised them to obtain a formal valuation of the property at the time when they both retired (sorry, Clapton – I misled you here but it was some years ago!) and also at 31st March 1982. This was to apportion taper relief for the time when a business asset and a non-business asset. I also advised them to wait a year as I knew that the HMRC would challenge the transfer if the sole objective was to avoid tax. They objected at the delay and the cost of the valuation but agreed to do so eventually. The HMRC challenged the transfer and, even though the lady had died in the meantime, persisted. Thankfully, all the documentation was in place and no adjustment was made to either SA.

Now I have attempted to find information on the HMRC website on this but was unsuccessful – jimmo would be much better placed to do that – have a look at the attached though – think it backs me up to some extent.


http://www.taxexpert.co.uk/property_tax/cgt_property.php

high-tower_2

CLAPTON wrote: »

Its quite clear, if your uncle owns the property and does not live there as his principal private residence then the sale will be liable to capital gains tax.

What was the approximate value of the property when it was signed over to your uncle?

If he is married then it may be tax efficient to give half the house to his wife so her CGT allowance can be used.

I'm not sure what the value was when she signed it over to him, its probably between 5-8 years ago he is not sure without looking at the paperwork, he has a neighbour who is an accountant that is going to go through it with him. He was suggesting something to do with 7 years of ownership or is this just for the maximum reduction in the amount that is taxed. Also from what i understand is that it would only be the proportion between what the value was (on transfer) and what it may sell for that is subject for tax?

Reading the notes on HMRC it suggests that my gran should maybe have paid CGT when she transfered the property to him? which as far as i know she didnt, i suppose this is now going to open a right can of worms.

ceeforcat

Little bit of reassurance - your gran would not have been liable for CGT as it appears that it was her main residence throughout her ownership.

The seven years you refer to is probably more to do with inheritance tax - if your gran had lived more than seven years after the gift to your uncle it would not be included in her estate for inheritance tax purposes.

If her estate is below £312000 (plus an increase for the percentage of inheritance tax threshold unused by her late husband if he predeceased her)
there would be no inheritance tax to pay in any case.

Your uncle would have a Capital Gain equivalent to the value at sale (less selling costs) minus the value at the time of transfer.

high-tower_2

ceeforcat wrote: »

Little bit of reassurance - your gran would not have been liable for CGT as it appears that it was her main residence throughout her ownership.

The seven years you refer to is probably more to do with inheritance tax - if your gran had lived more than seven years after the gift to your uncle it would not be included in her estate for inheritance tax purposes.

If her estate is below £312000 (plus an increase for the percentage of inheritance tax threshold unused by her late husband if he predeceased her)
there would be no inheritance tax to pay in any case.

Your uncle would have a Capital Gain equivalent to the value at sale (less selling costs) minus the value at the time of transfer.

Thanks for the info, that 200+ page pdf on HMRC website is quite confusing at times.

It would be nice to think her estate was in the realms of inheritance tax value but she lived comfortably with the pensions she had, so no vast reserves of cash in accounts held and the bungalow is worth around £120k.

So in real terms then the CGT may not hit us by as much as first thought, as i guess lets say it was worth £80k when transfered and sells for £120k then its only the £40k less selling costs and cgt annual allowance that tax is payable on. Is the tax rate 18% as i got quite confused as some of it mentioned 18% flat rate, other areas of the website suggested the gain (£40k for example) would be added to your taxable pay for the year and you would be taxed accordingly between 10 - 40% depending on the scale rate and in my uncles position that would end up as 40% as he's just about to retire from the police force after 25 years service so is on a good whack anyway.

Thanks for your help so far

cte1111

Everyone has an annual CGT exemption. If your Uncle hasn't had any other gains, then he will be able to use this to reduce the amount that he has to pay CGT on. Last year the annual exemption was £8,900, not sure what it is for 08/9.

Also, he will be able to apply taper relief, which means that if he owned the property for more than 2 years, then he will only have to pay CGT on a certain percentage of the profit. For 7 years (for example), the % chargeable would be 75%.

So if the total gain was £40k, after taper relief the gain would be 75% of that, i.e. £30k.

Then he could take off the annual exemption of £8,900, leaving £21,100 taxable. If your uncle is a higher rate tax payer, then the CGT will be 40% of that, i.e. £8440.

I hope your uncle's accountant friend will be able to explain this better.

high-tower_2

cte1111 wrote: »

Everyone has an annual CGT exemption. If your Uncle hasn't had any other gains, then he will be able to use this to reduce the amount that he has to pay CGT on. Last year the annual exemption was £8,900, not sure what it is for 08/9.

Also, he will be able to apply taper relief, which means that if he owned the property for more than 2 years, then he will only have to pay CGT on a certain percentage of the profit. For 7 years (for example), the % chargeable would be 75%.

So if the total gain was £40k, after taper relief the gain would be 75% of that, i.e. £30k.

Then he could take off the annual exemption of £8,900, leaving £21,100 taxable. If your uncle is a higher rate tax payer, then the CGT will be 40% of that, i.e. £8440.

I hope your uncle's accountant friend will be able to explain this better.

Yeah hopefully the accountant will be able to help as the government website is so confusing, as i said one bit seems to talk about a flat rate of 18%, another on your annual tax rate which would be 40% for him, i also read somewhere on the net that the taper relief had been scrapped but its still shown on the hmrc website .

Just been looking at house prices from 2000 in my grans area and around 2000 similar properties in her bungalow complex were selling for around £54k, £60k in 2001/2 and then doubled come 2004. I wish i could remember when my gran 1st said she had signed the house over to him, time goes so fast these days i cant remember if it was since the millenium or not, i guess it would be better if it was in the housing boom a few years ago but i doubt it, i guess the tax man gets you dead or alive.