Capital Gains Tax

flipdee

Hi Everyone,
I know there has been a lot of threads on CGT and various other things.
I haven't found one that covers the following scenario.
Can anyone give advice on how to calculate the potential amount of capital gains tax payable?
A house which was transfered into 2 childrens names 12 years ago (has been empty now (although occupier - their mother is thankfully still alive) (assuming now that's over 7years it won't be subject to inheritance tax), is it the "market value" of the house 12years ago which will be used as the starting point when calculating capital gains tax?
Also, if there was improvement works done to the house, potentially up to £40k's worth, might this have a serious impact on amount of CGT owed?
I think i read that taper relief (i.e. the longer the house is kept) doesn't really apply anymore, is this the case?
I see Which? Money had a paper based calculator for the 2007-2008 Tax Year but I think 2008-2009 rates and figures have changed significantly.
Any help would be greatly appreciated.

Many Thanks,
flipdee

noh

Two issues here.
If the house was transferred into the adult childrens name and the mother continued to live there without paying a market rent then that would be considered a "gift with reservation" and the value of the property would still fall within her estate for IHT purposes. The 7 year period would start from when she moved out if she was not paying rent.

The market value of the house when transferred is the correct figure to use in the CGT calculation and the cost of improvements is an allowable expense see "How to calculate capital gains on property"


Nigel

flipdee

Thanks a lot for your reply.
So would I be right in saying that if their mother didn't pay rent while living in the house the 7 year period only actually starts when she moves out?
I'm a bit confused between the IHT aspects and CGT side.I had originally thought the 7 year period was specifically for IHT purposes and didn't realise it was subject to any conditions such as the gift with reservation.
The whole things so complicated.
Many thanks for your continued help.
Flipdee

silvercar

For CGT the starting point is the value at the time of transfer. As the parties are related it would be the market value not the amount actually paid.

So you need the market value at the time of transfer of the property discounted for the sitting tenant paying no rent.

flipdee

Many Thanks for your reply.
Is there anywhere to find that market value? i.e. Where would HMRC get the value or how would they verify that value?
One thing I'm still confused about is this:
Say house is worth £55k in 1997 (this is when it is signed over to adult children)
Mother still lives in house (has not paid rent) until 2008 then moves out (at this point is now worth £240k)
So in 2009 the house might not even be worth £190k if it would even sell due to the current situation.
So as an example, How do the above figures fit into the CGT calculation, and seperately dare I ask for the IHT, although I am right that IHT isn't applicable unless the person in question dies?
Did I also get the right end of the stick that, due to the fact they lived on rent free in the house the 7 yr IHT loop hole timer doesnt start running until the moment they move out?
Sorry for not quite understanding this very easily.
Appreciate all of your help though!
flipdee

noh

The IHT gift exemption seven year period will, in this case, start from when the mother stopped living in the house rent free. I gave a link to the HMRC site in my previous post.
IHT is only payable after the death of a person and then only if the total value of the estate exceeds the limit in force at that time. The current limits are £312000 for a single person and £624000 for a married couple. If the mothers late husbands IHT allowance was not used then it can be tansferred to her.
So if, on her death, the mothers total estate is less than £312000 no IHT is due. If her late husbands allowance wasn't used then it can be tranferred giving the potential of £624000 without IHT being due. Info here:-http://www.hmrc.gov.uk/inheritancetax/

CGT is due on the sale of the property I posted a link in my previous post which gives a step by step guide to calculate the CGT.

If you sold the house for 190000 and the market value at the time of transfer was 55000 then the CGT calculation would be something like this:-

19000-55000= 135000

from which you can deduct the cost of sale (say £2500) and the cost of any improvements (you previously mentioned £40000)

135000-40000-2500 = 92500

The house is owned by two people equally so they each have gain of £46250.
Each individual currently has a CGT allowance of £9600. Provided they have no other gains in that tax year each of the children will have a CGT liability of

18% x (46250 - 9600) = £6597

CGT rates and allowances here:- http://www.hmrc.gov.uk/RATES/cgt.htm

If HMRC need to verify the value of the property at transfer they will ask the opinion of the Valuation Office. Info here:- http://www.voa.gov.uk/


Nigel

silvercar

noh's calculation looks good.

The starting point would be the value of the home with the mother as sitting tenant paying no rent. The valuation office will have actuarial tables that value this, it all depends on the age & health of the mother at the time of the transfer. I would expect the market value with a sitting tenant to be half to two-thirds of the vacant market value.

Some of the houseprice websites do go back as far as the late nineties, I think zoopla might be one.