Second property "tax" concerns and questions

numbers

Hopefully this is in the right section, so this is my situation as best as I can explain it and I hope someone can advise me.

My Mother in law had the opportunity to buy her council flat approx 13 years ago with a loan from a relative, but the relatives situation changed halfway along, and I offered to loan her the money. At the time of receiving the loan from me my Mother in law was having second thoughts about the purchase, so the agreement (done via a solicitor) was that the loan would be for three years with a fixed interest rate equivalent to the savers rates at the local building society at the time to allow my Mother in law the time to decide what she wanted to do. It was also agreed that my Mother in law would have two options at the end of the three years. Option i) Pay off the loan. Option ii) Sign the property over to myself in settlement of the loan and live rent free for the rest of her days.

After the three years my Mother in law decided she wanted to sign the property over to me and now lives rent free. This was ok at the time as I was in a position to help her and I saw it as a long term investment as part of my pension provision. It's now ten years since the flat was signed over to me and I am now worried about how the taxman may view the above agreement from the position of tax or capital gains tax now or when my Mother in law is no longer with us (I am happy to report she is in good health and expected to be around for some time. )

I have always been PAYE, have never needed sold anything to even think about paying capital gains tax or to pay tax on additional earnings as I have non, but I am now getting worried about the whole thing. Does anyone know where I stand with this situation? Am I liable for tax or anything? Should I be doing something now to protect myself from a tax bill in years to come as I understand I would be liable for CGT if I sell?

Everything was done through a solicitor like the loan and rent free stuff, documents signed etc, but the solicitor acted for my Mother in law and I declined legal advise thinking it was all straight forward.

Hopefully I am worrying unduly.

Thanks

numbers

puddy

you dont say specifically whether you own your own home or not, but i suspect that yes, you are liable for cgt from the date you aquired it to the time you sell it, ie if its gone up by 100k or whatever, then you take off your allowance for that year (when you sell), which at the moment is about 10k, then you pay 18% cgt on any amount which takes you up to the first earnings threshold (might be about 37k at the moment), but thats in addition to your own paye income, plus then you pay 28% on any other profit over the top of that

it would be a lot, especially bearning in mind that he sale price of the property 13 years ago was at a discount, so your 'profit' would be much more than if you had bought on the open market so to speak

if you dont own your own home and rent, then simply move into the mother in laws house for a year before you sell, apparently, if you dont live in a second property for more than 3 years (its not your main addres) then thats when it counts for '2nd home'.

if any of that is wrong, someone will correct it

Jowo_2

How does she stand under the 'deprivation of capital' and 'notional capital' rules if she ever requires care home services or applies for means tested benefits?

Will the local social services/DWP consider that she's deprived herself of her capital and treat her as if she still owns the property despite transferring it to you?

I don't really know the specifics of this but you may find someone on the Benefit forums who could tell you if this applies and point you to the specific guidance on this.

numbers

jenner wrote: »

you dont say specifically whether you own your own home or not?

Thank you for the reply and I do have my own home.

I guess what worries me is stories of people being charged tax on hypothetical rent which I think was when a parent gave the property to offspring and lived in property and people who have said I cannot charge zero rent and should have been charging a "peppercorn" rent?

The CGT I can live with as has been mentioned as the property was discounted, and so will still be an ok an investment particularly as my Mother in law will have had many years rent free, deal but I just don't want to get a huge tax bill. As the flat was not sold as such I guess as a higher rate tax payer it would be 28% tax on the sale price minus 10K, minus the loan value?

Thanks

numbers

silvercar

if you dont own your own home and rent, then simply move into the mother in laws house for a year before you sell, apparently, if you dont live in a second property for more than 3 years (its not your main addres) then thats when it counts for '2nd home'.

if any of that is wrong, someone will correct it

You are getting confused with the last 3 years of ownership being exempt from CGT if it was once your home. Not applicable here.

How does she stand under the 'deprivation of capital' and 'notional capital' rules if she ever requires care home services or applies for means tested benefits?

Will the local social services/DWP consider that she's deprived herself of her capital and treat her as if she still owns the property despite transferring it to you?

I don't really know the specifics of this but you may find someone on the Benefit forums who could tell you if this applies and point you to the specific guidance on this.

The benefit people may consider that she has the profit from the sale, as if she had bought with a discount and then sold to you. They would then work out how long it takes her to use up all her assumed capital before being eligible for help.

The home could still count as being part of her estate as she is not paying market rent.

As far as your own CGT bill is concerned, you bought at a discount and have the growth in its value yet you have a CGT bill in all probablilty. Swings and roundabouts.

CapitanPugwash

jenner wrote: »

if you dont own your own home and rent, then simply move into the mother in laws house for a year before you sell, apparently, if you dont live in a second property for more than 3 years (its not your main addres) then thats when it counts for '2nd home'.

if any of that is wrong, someone will correct it

Hi

The above is incorrect in that you get CGT relief (don't pay CGT) on your main home- FOR THE TIME YOU LIVE IN IT. There is an additional relief that means even if you live in it for 1 year you get 3 additional years free from CGT. You may see this referred to as PPR relief- Principal Private Residence. So, this means that if you owned the house for 8 years and lived in it for 1 of the 8 years, you would get 1 year + 3 years free from CGT, meaning you would pay CGT on 4/8 (or half) of the profit. So say £80,000 profit, then you pay CGT on 1/2 of this or £40,000. You can also nominate your PPR retrospectively.

To complicate this you get lettings relief if you have let it out (to your MIL) being a max of £40,000 (in this case), so no CGT to pay. You would also have had £10,100 allowance on which you don't pay tax on. If you owned this jointly with your wife you would get 2 x £10,100 allowances.

This could be altered once the small print comes out from the budget but you may need to consider moving into her house (which depends on your main residence situation) . You certainly need to speak to an accountant to plan ahead for this. There are many implications. Do not worry though, there are many work arounds for these situations.

Hope this makes sense. Got to dash as I've got tea to eat!

Good luck,


CP

numbers

Jowo wrote: »

How does she stand under the 'deprivation of capital' and 'notional capital' rules if she ever requires care home services or applies for means tested benefits?

Will the local social services/DWP consider that she's deprived herself of her capital and treat her as if she still owns the property despite transferring it to you?

These are the kind of things that also worry me as I know nothing about the benefits system, but we live in Scotland which I think differs from rest of UK and may at the moment be more lenient.

As for benefits, I am 95% sure my MIL doesn't claim any and with extremely simply tastes survives on her works and state pension.

Thanks

numbers

silvercar

As the flat was not sold as such I guess as a higher rate tax payer it would be 28% tax on the sale price minus 10K, minus the loan value?

I'd guess that it was the price you paid when she bought it or its value when she signed it over to you - I doubt it would be zero.

If you post on the taz board of this forum there are some CGT experts, including jimmo an ex-revenue CGT inspector.

numbers

silvercar wrote: »

The home could still count as being part of her estate as she is not paying market rent.

This is the kind of thing that I refer to earlier, but do not understand, should I be charging rent?

I own the property, it was transfered to me to settle a debt, part of that debt settlement was the MIL's right to live rent free, my name is on the title deads, I hae the title deads, so I don't understand how it can be part of her estate, which is why I have asked for help.

A major concern based on this comment if it was part of her "estate" would be that her will benefits her son (rather than her daughter my partner) as we agreed that he is more needy than us. So in effect if the property were part of her estate he would get it?

Thanks

numbers

numbers

silvercar wrote: »

If you post on the taz board of this forum there are some CGT experts, including jimmo an ex-revenue CGT inspector.

Thanks for the advice and I'll post a CGT related question on the tax board once I better understand the legal/ownershp questions which appear to be a real concern.

Thanks

numbers

silvercar

numbers wrote: »

This is the kind of thing that I refer to earlier, but do not understand, should I be charging rent?

I own the property, it was transfered to me to settle a debt, part of that debt settlement was the MIL's right to live rent free, my name is on the title deads, I hae the title deads, so I don't understand how it can be part of her estate, which is why I have asked for help.

A major concern based on this comment if it was part of her "estate" would be that her will benefits her son (rather than her daughter my partner) as we agreed that he is more needy than us. So in effect if the property were part of her estate he would get it?

Thanks

numbers

When you sell something but retain the right to live in it, you are really keeping hold of it and therefore the inheritance laws consider it to be part of your estate. To exclude it from the estate you would have to charge a market rent, but you can't do that due to the terms of the sale.

In terms of her benefitting from the will, the property's value may be ncluded in the estate and any inheritance tax calculation could include the value of the property. There would be no question of the son getting the property. Technically on her death you would inherit something as you move from having a property with a sitting tenant paying no rent (your MIL) to an empty property.