Trust deed- capital gains tax ?

nisadave

I gave my parents the money to buy their council house in 2003 and they placed it in trust to me.On the trust deed it refers to myself as the purchaser.My mother died last year and my father has now moved into residential care.My father can now sign the house over to me.If he does am i liable for capital gains tax also if the house is left in his name would i actually inherit the house after his death and therefore avoid CGT.also what would happen if i sold my own home (no cgt payable) and moved into his empty home and sold it after his death.Would this attract cgt as it would now be my main home ?
Regards
Dave b

John_Pierpoint

I presume there is no suggestion of your parent's estate being liable to Inheritance Tax?
However it could be liable for care home fees?
I would think that HMRC would check the Land Registry first; so how has the house been registered to its legal owners ? (I had this problem when my mother died; in reality she was the life tenant of an interest in possession trust). What sort of "Trust" arrangement do you have?

nisadave

Not sure what type of trust it is but i have a copy of the trust deed.It acknowledges the transfer of the freehold with full title guarantee from the local authority to my parents (The trustees) in 2003.And that they will hold the property in trust for me (The Purchaser)It mentions the purchase price was paid by the trustees but provided by myself and states that my parents will at my request transfer the title to me at such time and in such manner as i direct. (no mention of upon death)
The solicitor says all that it would take for transfer is for my father to sign one form for land registry purposes (if this helps)
Just to add his whole estate including the house is probably less tan £120k so would not be subject to inheritance tax

John_Pierpoint

I think jimmo's advice is likely to be much more useful than mine (check his previous postings) but for what it is worth we both came to a similar conclusion:
It sounds like a bare trust to me (but I'm not a lawyer.)
If so it should not have any tax consequences if you personally take possession of your house.
How long ago was it that the house became yours ? (Ah 2003) I ask this because once upon a time we were allowed two houses free of CGT. The second house had to be provided for a dependant parent regardless of that parent's income (I think they had to be widow or widower though). (2003 is definitely too recently).
Did the complexities of the right to buy legislation force you to add this complexity to the ownership of your house?

nisadave

First of all thanks John and Jimmo for your detailed replies.My mother and father took the advice of their solicitor who set the trust up in this way.The house was bought under the right to buy scheme and the title could only be transferred from the council to the tennants (my parents) They did not have any money so i provided the funds and the solicitor set up the trust to protect my investment should they require care in later life. Are you saying that this trust can somehow be disregarded by the council ? if so where does that leave me now.Regarding the CGT if i have always been the beneficial owner could you give me an idea of the CGT that would be due.The purchase price was £14600 in sep 2003 and the selling price now would be approx £90000 i also have a reciept for new kitchen at a cost of £4000 in 2003.My parents have paid me no rental income. Once again thanks for your help so far and i will phone the solicitor later today and find out exactly what type of trust was actually set up.If i have always been the beneficial owner does that mean that the council have to disregard the house when calculating my fathers assets ?
UPDATE
Just rang the solicitor and he says it is a Simple trust ?

John_Pierpoint

I think he meant "Bare" - The first time a solicitor said that to me, I sent him my notes of the meeting about the "bear" trust - I thought it must be something to do with investments and bulls & bears on the stock market :rotfl: (Well I was only 21 what did I know ? - hopefully I've learned a bit in the last 45 years.;))

The solicitor has been sensibly crafty BUT I don't know the current legislation or the rules in 2003; HOWEVER I was trying to find a good value house a dozen years ago - and I eventually got a probate sale, where a former council tenant had died in a house having exercised the right to buy.
I also viewed another council house that was promising BUT the divorcee who had bought it (and her boyfriend), had spent too much playing happy families and "improving" the nest. My investigation of the title at the Land Registry suggested that it was a forced sale BUT It was Easter and the property could not be "sold" until the following August, without some of the discount going back to the Council, and I did not want to wait that long.

You might find that your trust only protected you against your parents selling to someone else but could not protect you against the council's rights for (say) 10 years.
Have you had a look at the Land Registry? It is well worth spending a tenner or so to see if the Council has any legal power over "your" house. (You can do it on-line)
(As well as: you cannot sell this until ddmmmyy, there may well be a covenant preventing the building of extensions without paying a blackmail fee to the council. How about the drains - do they run through the gardens thus giving a right to move in with a JCB?).

Your solicitor probably knows the answers to these questions but talking to him/her costs you (say) 150 - 200 GBP per hour, so it is worth getting your head round the concepts, so you at least have a sensible conversation for your money.

nisadave

Looked on HMRC website and they refer to Bare trusts also being known as Simple trusts.So i may have a CGT liability. So could anybody give me an idea of what (if any) is due should i sell now based on the figures i gave in my previous reply.The solicitor has told me that because of this the council cannot make any claim against the property for my father's carehome fees.
Thanks again for the help so far
Dave

John_Pierpoint

I doubt they would allow you the 4K kitchen as a capital improvement, as you are not commercially letting the property (but I don't know).

So 90K - 14.6K = 76.4K - 10.1K (nil rate band) = 66.3K * 0.18 = 11.9K payable by self assessment.
(you would have some allowable costs of sale and possibly costs of purchase, which would make a modest reduction in this sort of figure)

What does the Land Registry say about who bought the property and how much they paid?

HOWEVER - Cameron keeps on refusing to answer the question about what the budget will do to second home owners or says "we have got to get the money from some where".

nisadave

Not sure about the land registry i would presume that it would say that my parents bought the property(it is registered at land registry in their names ) for £14600 as they were the only ones who had "the right to buy" from the council but the trust deed acknowledges the fact that it was my money that was used.Would that mean that they bought it in the eyes of HMRC and therefore no CGT liability for me.Can it be that its theirs for CGT purposes,yet mine when it comes to Council trying to make a claim on it for carehome fees? Surely i can't have my cake and eat it or has my solicitor done a crafty (but legal) juggling trick ?
The solicitor has said that my father would have to sign a landregistry TR1 form to transfer the title to me so although i paid for it He owns it.So if he dies before he transfers the title to me do i then inherit it and therefore no CGT ?

John_Pierpoint

Well in your case you have got no revenues but .............

Here is an example of HMRC arguing it out internally as to what can be written off immediately against income taxes at 20/30/40/50% as against future CGT at 18% (until the next budget?).

Begrudgingly, "double glazing" is now accepted as a repair - actually it is a legal requirement under the FENSA regulations. Single glazing is illegal in replacement windows. (but see un-joined up government with respect to listed buildings & conservation areas). It is all about climate change and international commitments to reduce CO2 emissions.

Meanwhile replacing a worn out kitchen, might well be capital expenditure as it "improves" the property?
(In my experience there is no correlation between the "flashness" of the kitchen and the quality of meals created in it but we won't get into that debate).

Once again Jimmo is right a flash kitchen is a capital expense:

Even if the repairs are substantial, that does not of itself make them capital for tax purposes, provided the character of the asset remains unchanged. For example, if a fitted kitchen is refurbished the type of work carried out might include the stripping out and replacement of base units, wall units, sink etc., re-tiling, work top replacement, repairs to floor coverings and associated re-plastering and re-wiring. Provided the kitchen is replaced with a similar standard kitchen then this is a repair and the expenditure is allowable. If at the same time additional cabinets are fitted, increasing the storage space, or extra equipment is installed, then this element is a capital addition and not allowable (applying whatever apportionment basis is reasonable on the facts). But if the whole kitchen is substantially upgraded, for example if standard units are replaced by expensive customised items using high quality materials, the whole expenditure will be capital. There is no longer any relief for ‘notional repairs’, which is the notional cost of the repairs that would otherwise have had to be carried out.

What we regard as a repair will necessarily change with the passage of time to reflect technological improvements. This issue was considered in the tax case Conn v Robins Brothers Ltd [1966] 43TC266. As a result we accept that the replacement of a part of the ‘entirety’ with the nearest modern equivalent is allowable as a repair for tax purposes and not disallowable as improvement expenditure.

An example is double-glazing. In the past we took the view that replacing single-glazed windows with double-glazed windows was an improvement and therefore capital expenditure. But times have changed. Building standards have improved and the types of replacement windows available from retailers have changed. We now accept that replacing single-glazed windows by double-glazed equivalents counts as allowable expenditure on repairs.

Generally, if the replacement of a part of the ‘entirety’ is like-for-like or the nearest modern equivalent, we accept the expenditure is allowable revenue expenditure.

http://www.hmrc.gov.uk/manuals/pimmanual/pim2020.htm

On the subject of complex legalities; I legally own a modest amount of unregistered land as a bare/simple trustee on behalf of other family members. It is more of a liability than an asset. Until last year, I could simply rewrite the trust document to change to a different trustee (perhaps my son) BUT as from 2009 I would have to register this as a change of ownership (and pay the Land Registry charges involved). You may find that you need to "regularise" your ownership of your 2nd house with the Land Registry, should you want to change anything to do with the present arrangements (there may be problems of "compos mentis" approaching on the part of your trustee ?).This rather reminds me of an episode of the Radio 4 "Moneybox" programme before a live audience.
The queen of "Moneybox", one Louise Botting, was asked a question along the lines off "I am the executor of a will for a 50K estate leaving everything to the daughter but I have now found a document that seems to say the daughter had borrowed 20K from the parent. What should I do?
Louise's, perhaps light hearted joke reply was "put it through the shredder".
The audience reaction was a mixture of friendly laughter and indrawn breath.
I was with the latter camp - you can think that but you cannot say it.

http://wapedia.mobi/en/Louise_Botting

nisadave

Thanks again guys for your very informative answers i really appreciate you taking the time to respond to my questions.With regards to the capital gains tax scenario i believe i could further offset my gains on this property.I have some shares which currently show a loss of about £1000 is it true that if i sell them in the same tax year i can use this loss to offset the gains made on my fathers house house ?
At the moment my father appears to be showing signs of dimentia and may be unfit so sign the transfer deed (sound mind etc) I am not sure how that affects my ability to take possesion of the property,However i will post an update regarding this and on the outcome of the councils decision on the bare trust deed as soon as i have more information,Thanks again for your help so far
Dave