Capital Gains Tax & Mortgages

Pearcy45

Hi All,

I am in the process of obtaining a mortgage for my current home, which was purchased by my mother nearly three years ago via an outright cash sale, totalling £49,995.00.

My mother holds the deeds and is willing to sell the property to my wife and I for £65,000k, 20k than it's current valuation of 85K.

I want a mortgage for £85k which will give us £20k to spend on improvements and pay of some outstanding debts, whilst paying my mothers asking price of £65K. In essence my mother will be gifting us the 20k as a deposit.

I need advise on how my mothers capital gains tax would work. I believe that because my wife and I want to purchase the house, my mother will be liable for a capital gains tax bill for the £85k. As my mother is only asking for 65k surely her capital gain should be for 65k??

I have been through some scenerio's where my mother has been asked to place the deeds in my name, deed of title, however this can take upto 3 months and then we would have to apply for a re-mortgage. However, this process is too lengthy as we need the extra 20k before the end of October 06.

I have been advised that we just obtain a mortgage for £65k and then apply for a mortage for the remaining equity. However, I believe I will be left to pay for an additional survey and legal fees for the re-mortgage.

Can the deal be completed through a solicitor advising them of the deed of gift, that would lead to my mother only paying capital gains tax for £65k not £85k in the one deal.

Any help and guidance would be most appreciated.

Pearcy45:o

Ian_W

Hi Pearcy,
I'm no expert but hopefully this bump might get some of them to comment. There appear to be issues with the mortgage here as well as CGT but for the latter you'd be better posting on the Cutting Tax board than here.

I'm presuming your mum has never lived in the house as her main residence? If she has it is exempt from cgt for the time she lived there plus the last 3 yrs ownership. If she hasn't she will be liable for the gain from buying to selling and, as I understand it, though she can sell for what price she wants HMRC will expect the declared gain to based on a reasonable market value. They are likely to look closely at this as she's selling to her son - they do have access to Land Registry records so are likely to be aware of this. She can deduct her buying and selling costs plus any capital improvements she made to the property.

On that basis her gain is, in round figures, £30k. As she's owned for 3 yrs she'll get 5% taper relief and can deduct her personal CGT allowance of £8,800 [if she doesn't have any other capital gains this tax year] leaving around £20k on which she will be taxed at her marginal rate. If she pays basic rate about £4.4K or higher rate £8K. As I said I'm not an expert and she should seek professional advice to ascertain whether the above is correct.

I think you might find some lenders won't accept the gifted deposit scenario, particularly as you appear to want a 100% mortgage. Perhaps one of our resident mortgage advisors might comment on that. If you purchase and mortgage at £65K you will not be able to remortgage to 100%, 95 is usually the highest and even then many lenders will have a higher lending charge.

HTH and BoL.