Capital Gain Tax - Urgent Help Required!

LISA80

I have just purchased our house from my mother at a discounted price and am now panicking that we may be about to be hit for capital gain tax. Mum is still living in the house (rent free) and I don't know if this makes a difference?

Mum bought the house for 52,000 in 1997
Market value now 160,000 I purchased from mum for 90,000

Can anybody please advise if we have any liability and if so how much it is going to hurt? Anyway of avoiding this?

olivetti

Your mum would be the one liable for CGT, as she sold it. However you can claim Principle Private residence relief for your home so your Mum will not have to pay anything :-)

One point that you will need to consider if you ever sell the house and it is not your home (i.e. where you live for the majority of the time) then you will be liable for CGT. The price you paid will be considered to be the market value at the time of purchase, not what you paid as you and your Mother are connected persons for tax purposes.

EDIT: there will be IHT to consider if your Mother does not survive the next 7 years.

jiggy2

For capital gains - has your mum lived there since she bought the house? If so principal private residence will apply as olivetti mentioned

IHT - there may be more issues to worry about - as the "loss" from her estate is £160,000 with the house against which a £90,000 cash increase in her estate,there is a transfer of value. Her living there rent free may have tax issues as well -u might want to look more into whether gifts with reservation / pre -owned asset rules apply.

LISA80

My mum has lived in the house since buying in 1997 and will continue to live here, with regards to IHT I am not 100% sure what you mean (jiggy2) please could you clarify further?

Is there not a limit on the value of the property before you have to pay IHT? I thought it was above the value of the house as it stands (ie 160,000)

Cook_County

This is clearly a gift with reservation, a deprivation of an asset for future benefit purposes and may lead the OP to be subject to CGT on a future sale.

Who advised on this transaction?

LISA80

Sorry I am not up on the lingo what is OP?

Had no choice mum was starting to struggle to keep the house financially and the house needed repairs! It seemed to be the obvious answer although no-one thought it would be a good idea to let us know about CGT!

Only in hindsight have we realised we may be liable! Please understand that this was never meant to be an IHT avoidance (my mum is the young age of 54!)

LISA80

I thought I'd better provide further information - this is the only asset that my mum owned there is nothing else! Unfortunately she would not have been able to keep the house in a good state of repair for much longer..

Until yesterday I had not even heard of CGT therefore the whole thing is just one HUGE grey fuzzy subject that I know/understand nothing about!

CLAPTON

If your mother owed and lived in the house until you bought it from her then there is no CGT at the time of transfer.

However, if you yourself do not live in the house then, when you sell it in the future you will be liable for CGT.


As far as IHT is concerned this only matters if your mothers assets (including the value of the house) will be more than 325,000 (or twice that if she was formally married and her husband left everything to her).... that's because the house is considered as gift with reservation and so will count as part of her estate)..
from what you say then this will not be a problem.

Anyway the important thing is that any CGT will only occur when you eventually sell the property.

Cook_County

Given that you had £90,000 in savings to give to mum why did you not just loan it to her?

Did your solicitor not advise you on the CGT implications when the property is eventually sold?

LISA80

I did not have any savings I myself have taken a mortgage to buy the house from mum (90,000 was the max I could take on a mortgage)

All parties involved - mortgage advisors, solistors, banks etc - nobody told me about CGT!

I live in the house as well therefore I assume that if I sell the property at a later date I would not be liable either??

Dithering_Dad

Why didn't you just take out a much smaller loan to carry out the repairs on your mum's house? - I'm assuming it'd amount to much less than £90k, plus associated legal costs & mortgage arrangement fees, to buy it. You could then have looked at your mum's finances (in a similar way that they do on the DFW) to see if any savings could be made or any benefits claimed that could have secured your mum's future without her losing her only asset. Her net worth has now gone down from £160k to £90k in a single transaction - IMHO this is a far worse outcome than if she (or you on her behalf) had simply re-organised her finances and arranged a loan or remortgage to fund the property repairs. Still, you've turned £90k into £160k, so well done - that was an excellent bit of business.

Neither you or your mum is liable for CGT, hence the reason no one mentioned it.