capital gains tax--help please

jorgenson

myself and my 2 siblings bought my parents ex council house approx 15 years. my mother has and still lives in it rent free. when purchased it cost approx £10,000 after discount and has a possible market value of £80,000 now.My mother is 82 years old and still in relatively good health but one day the inevitable will happen. i know we will be liable for some capital gains tax, how does the inland revenue find out you are selling the house,ie do you have to notify them or would the solicitor who is dealing with the house sale do it.i was thinking of putting all the siblings spouses onto the deeds or into a deed of trust to see if this would limit our tax bill. any advice or explanation of how the system works would be much appreciated. thanks

olbas_oil

It's a 'disposal' that may incur a liability to CGT, and that means when an owner (any of you 3 who presumably own 33% each) sells (or gives) his share to someone else.

The gain is worked out by disposal value (which may be discovered through sale on open market - or arrived at by valuation/agreement with HM Customs) less acquisition cost. In your case it would be 80k/3 = £26k less 10k/3 = 3 = roughly £23k. In fact since you can take off estate agent fees, solicitors etc, I'd round that down to £21,600. You have an annual allowance of £9600, so that means a tax bill of 18% of £12k, or about £2150.

Important to note that it is the change in ownership - not an actual sale -that brings this about. Be cautious then that any attempts to mitigate this could bring it on all the sooner, if done badly... hence the need for legal advice.

However disposals between husbands and wives are done at zero gain (If you gave half your third to your wife, it would be assumed this was done at your original cost -not todays value). So if you all did that now - there's no gain and six owners ready to use next year's allowance. Or you could give half to a child - that does trigger a gain, but under the annual allowance.

But I have to say I wouldn't. If the three of you have managed without arguing then well done. Imagine how complicated it would get with six owners all trying to agree! Imagine the legal fees - better by far to accept a minor tax bill on a large gain.

The only thing I would want to clearly establish is that everything was done properly 20 years ago. If your mum were to go into a home, it would be important to establish that she does not in fact own the house. There are certain rules in which giving a house away and continuing to live in it rent free are discounted.

silvercar

Good advice from olbas_oil.

You do need to check whose name(s) where put down as owners when it was first purchased. It may have been necessary to put it into the name of your mother in order to make the purchase. If this is the case, then its initial value to you will be discounted by the fact there was effectively a sitting tenant paying no rent (your mother).

jorgenson

many thanks for your replies all opinions are gratefully received.

stevetodd

I seem to recall that you are not liable for capital gains tax if you own another property and a dependant relative lives in it rent free, so there may be no capital gains tax in this situation. I am sure this was the case a few years ago and I THINK that it has not been changed. Check with the Inland Revenue they are very helpful. There may however be a key date of 6 April 1988 and if your mother has not lived in it rent free (and presumably you would have also had to have owned it the too) from that date then a liability will probably exist. If this is so perhaps you should ask if there is any pro-rata'ing based on the dates? (I suspect not though)

terryw

jorgenson wrote: »

SNIP
, how does the inland revenue find out you are selling the house,ie do you have to notify them or would the solicitor who is dealing with the house sale do it

When there is a change of ownership of a property, a comprehensive stamp duty form must be completed and sent to the authorities. This is usually completed by the solicitor or conveyancer who dealt with the matter. The information on here is checked against the sellers tax returns to ensure that the CGT has been declared In any case the seller must declare any CGT liability at the end of the tax year .

terryw

silvercar

stevetodd wrote: »

I seem to recall that you are not liable for capital gains tax if you own another property and a dependant relative lives in it rent free, so there may be no capital gains tax in this situation. I am sure this was the case a few years ago and I THINK that it has not been changed. Check with the Inland Revenue they are very helpful. There may however be a key date of 6 April 1988 and if your mother has not lived in it rent free (and presumably you would have also had to have owned it the too) from that date then a liability will probably exist. If this is so perhaps you should ask if there is any pro-rata'ing based on the dates? (I suspect not though)

There is a magic date. At that time you have to own the property and have installed the relative. If you missed the date you get no benefit - there is no pro-rata-ing.

The key date is 5 April 1988. At that time the relative needs to be old, infirm or widowed. See here:

http://www.hmrc.gov.uk/manuals/cg4manual/CG65550.htm

silvercar

Reading OP again, you won't get dependent relative relief as you didn't buy before 5 April 1988.

See here:

"This limitation to dependent relative relief was introduced in the 1988 Finance Act and, in effect, closes the class of qualifying properties at 5 April 1988. To have simply abolished the relief at that time would have been unfair to any person who had incurred the expense of provided a dwelling house to a dependent relative in the expectation that relief would be due. Relief will continue to be due to anyone who had provided a dwelling house to a dependent relative before 6 April 1988 in respect of that dwelling house as long as it is occupied by that dependent relative. So to that extent, dependent relative relief can still arise after 6 April 1988.
But no new houses can qualify for the relief in respect of the occupation by a dependent relative after 6 April 1988. Houses which already qualify because of occupation by a dependent relative before 6 April 1988 cannot qualify for a period after that date as a result of occupation by a different dependent relative. "