Property and tax on gifts / inheritance tax...?

frivolous_fay

Hi,

I've been living with my partner in a flat which is owned by his parents. The understanding has always been that the flat is ours in all but name (we pay the mortgage, which had to be secured on FiL's house as we were unable to raise one ourselves.)

Now we're wanting to move, we face some trickiness in terms of capital gains tax. Any profit on the flat will be given to us towards our first mortgage. The only problem is, of course, that on paper we don't own the flat to sell, so FiL will be hit with capital gains, taking huge chunks out of our deposit!

To add a further complication - FiL has started to talk about buying us out and letting the flat himself. As far as I can tell, tax-wise, this would be a far worse option regarding tax liability. He'd have to give us the amount of money the flat has gained in value - approx £64k - and surely this would be taxed as a gift, or something? Could this figure be broken up somehow and qualify as inheritance under the 7 year rule? Am I completely overlooking other relevant factors?

Any tips would be appreciated

clutton_2

i think you seriously need advice from a specialist here - without any legal "title" to the property, you are in a very vulnerable position. An accountant who specialises in property may well have some ideas for you.

""on paper we don't own the flat to sell, so FiL will be hit with capital gains, taking huge chunks out of our deposit!""

with respect here, they have helped you and your partner out with getting a mortgage almost on your behalf, and surely they should not be out of pocket as a result ? You have amassed a large profit towards your deposit - why not do the decent thing and at least offer to pay 50% of the CGT ? or is there more to this ? Sorry it this sounds a bit harsh, just trying to look at it from both points of view.

frivolous_fay

Whatever tax bill there will be, it's going to be us who gets hit for it, not FiL. They're not going to be the ones out of pocket I certainly wouldn't expect to receive the entire profit while FiL paid the tax bill!

We certainly appreciate that they have remortgaged their house to help us out. The deeds were almost put in our own names, but FiL was advised that would be unwise (fair enough).

They're not interested in profiting on our flat and they'd rather we got on the ladder.

frivolous_fay

In summary...

Any profit (either through selling, or buying us out at the approximate market price) will have tax deducted from it, and we'll get whatever's left after the tax man has gorged himself.

Ian_W

Hi Fay,
You may be better posting this on the Cutting Tax Board further down the list.

I'm no expert but I'm not aware of any tax to be paid if your FIL gives you the money as a gift. The only proviso I'm aware of is that if your FIL dies within 7yrs of making the gift some or all of the £64K will still be considered to be part of his estate for IHT purposes.

What tax do you think you would have to pay on the gift?

frivolous_fay

I understood cash gifts are taxable... As a capital gain, perhaps?

The way I see it, either way we're going to get hit... either by CGT, or inheritance... I'm definitely confused.

Will post further down. Didn't spot the tax forum. Cheers!

Ian_W

That's no my understanding on gifts but I'm no expert.

IHT is only payable when your father dies, if it's not within 7 yrs not even then on this money. Also it's his estate - not you - who get taxed.

Hope you get a more authorative answer on the other thread.

cash99

If the flat had been in your name then CGT could have been avoided.

Has your Fil been declaring your mortgage payments as rental income.

Was any agreement drawn up between you and the Fil?

It may be possible to argue that you are the beneficial owners of the flat, even if you are not the legal owners, in which case the capital gain would fall on you and would be exempt. This may be a long shot, and you definitely need professional advice, but given the amount of tax involved is worth a try.

If the above is possible and Fil wants to keep the property, he can pay you the £64k tax free.

If the above is not possible and Fil gives you an amount of money then subject to him living for 7 years no tax would be due. CGT would not be an issue at this stage as the property has not been sold. This is very tax inefficient however, as the money given to you will not be taken into account when Fil finally sells.

With the tax amounts you are faced with professional advice is a must, and if you are ever in a similiar situation again take professional advice before you do anything.

frivolous_fay

cash99 wrote:

It may be possible to argue that you are the beneficial owners of the flat, even if you are not the legal owners, in which case the capital gain would fall on you and would be exempt. This may be a long shot, and you definitely need professional advice, but given the amount of tax involved is worth a try.

Someone else has mentioned this. There was no agreement drawn up. FiL was advised it would be foolish to put the flat in our name when the mortgage was in his name and secured on his own house! (Understandable.)

cash99 wrote:

With the tax amounts you are faced with professional advice is a must, and if you are ever in a similiar situation again take professional advice before you do anything.

Perhaps we counted on the solicitor too much to give us advice. It seems he wasn't thinking of the bigger picture, and he's put us in an awkward spot I think he was more interested in protecting FiL's interests, than ours. Who would you say should we have spoken to at the time?

Tiggs_2

frivolous_fay wrote:

I think he was more interested in protecting FiL's interests, than ours.

thats his job!

i posted on the other thread you linked from the tax forum.

frivolous_fay

;-)

When I have children, I'd like to think my solicitor isn't going to try to screw them over :rotfl: