Grandad gave her the flat !!

Mrs_MM

I need some advice..

My grandad had a 1 bed council flat for years and decided to retire back to the caribbean. My aunt (his daughter) decided to buy the flat under the right-to-buy scheme before he left in 1993 for £15k so it was bought in joint names between the two of them.

The flat has been rented out ever since, with my aunt being the responsible for the repairs etc..

My aunt sadly died in 2008 leaving two adult children (S&N), all of her estate was divided between them both. The flat went back solely into my grandads name as he is still alive.

He has willingly signed over the flat to both of his granddaughters (S&N) the transfer was completed in April 2010, but they do not want the responsiblity of being landlords and want to actually sell the flat. It has been valued and is now worth £235k. There is no mortgage left on the flat.

What will they need to be aware of in terms of taxes etc as they are totally oblivious. Do they need to pay CGT or inhertance tax or any other taxes. How much wil they get each as it will be split 50/50

Please advise

Many Thanks

silvercar

The 2008 value of half the flat would have been included in your aunt's estate and inheritance tax paid if her total estate was greater than the limit for IHT.

S&N then acquired the flat in April 2010 at what is deemed to be market value as they are related parties. Selling it now shouldn't trigger any CGT liability as the value between April and summer 2010 won't have changed much. If it has increased slightly, they both have £10,100 CGT allowances to utilise.

Your granddad's position is less clear. Is he liable to pay tax in the UK? If he is then he has a liability for CGT triggered by the transfer to S & N.
He has two parts the transfer of the part he owned since 1993 and the part he owned since 2008. He would be exempt for the last 3 years of ownership as this was once his home. On one half he has a gain of 117.5-7.5=110k and the other a gain of 117.5 less half its 2008 value. For clarity I'll assume that its 2008 value was roughly what it is worth now. So there is a total gain of about 110k. Against this there will be a small deduction for the time when he lived there and owned it and the last 3 years of ownership (I reckon about 20k) there will also be letting relief (again about 20k) and his personal CGT allowance (£10,100). So the total liability could be CGT on around 60k. CGT tax rate in April was 18%, so his bill would be £10,800. To be absolutely clear, this is his personal CGT bill arising because he disposed of his property that hadn't been his residence for a long time. As the parties are related it is deemed to have been done at market value. The big assumption I am making is that he is liable for CGT in the UK. I haven't got a clue on whether this is true. One clue would be whether he has been declaring the rental income on the property for all these years. I presume the aunt was in the UK and declaring her rental income also. If not there could be a problem; it is often a death that brings this sort of thing to the revenue's attention.

Mrs_MM

Thanks for the reply SilverCar, I have just been told that the flat is actually valued at £399k not the £235k as previously stated !! does that add any further implications ??

My aunt was not paying tax on the rental income and my grandad does not pay any tax in the UK, (although he does recieve his pension overseas).

I understand that the CGT is rising from 18% to 28% so if S&N manage to sell within the next few months how will this affect them tax wise ??

BitterAndTwisted

Where in the country would a one-bedroomed ex Local Authority flat be valued at £399k? Belgravia?

If your family members really so stand to inherit that much they should be able to come up with some money for professional advice.

Jowo_2

The HMRC website gives information, and examples, on how to calculate CGT. The Landlordzone website also has a tax forum where people who work in this field are members.

http://www.hmrc.gov.uk/cgt/property/index.htm

The 18% rate remains for low earners. The 28% rate for high earners was applied at midnight on the 22nd June budget.

The implication of the value of the property being 399k rather than 235k is that there is an additional potential gain of 176k that is subject to taxation...

http://www.guardian.co.uk/business/2010/jun/22/budget-capital-gains-tax-rises

preable

hahahahahaha this is so funny a 1 bedroom valued at 399k Where on earth is that locted mayfair in london

mustrum_ridcully

preable wrote: »

hahahahahaha this is so funny a 1 bedroom valued at 399k Where on earth is that locted mayfair in london

Could be the Trellick Tower... people pay stupid money to live there.

silvercar

Thanks for the reply SilverCar, I have just been told that the flat is actually valued at £399k not the £235k as previously stated !! does that add any further implications ??

Yes. Did they pay stamp duty? I think they should as the transaction is between related parties and therefore assumed to be at market value. It also increases its value in 2008, and so inheritance tax may have applied.

My aunt was not paying tax on the rental income and my grandad does not pay any tax in the UK, (although he does recieve his pension overseas).

I don't know how someone earns income in the UK is allowed to not pay tax. As I said before, the sale could cause the revenue to investigate, so they may want to check all is above board.

I understand that the CGT is rising from 18% to 28% so if S&N manage to sell within the next few months how will this affect them tax wise ??

I thought I'd made it clear in my earlier post, S&N are hardly likely to have a liability for something sold two months after purchase as the gain won't be much in 2 months. The gain is all on your grandad. Its higher value means a higher gain and a higher tax bill. Even living overseas, I would have thought a gain in the UK would be taxed in the UK. He is looking at a bill for £40,000 roughly! That being the case, he should be asking S&N to contribute, being they got the property for nothing, though legally they have no obligation to pay anything.

Thrugelmir

silvercar wrote: »

I don't know how someone earns income in the UK is allowed to not pay tax. As I said before, the sale could cause the revenue to investigate, so they may want to check all is above board.

If it is the case that no tax has been paid on rental income. Then consult professional advice immediately.

The potential liability could run into thousands of pounds. The HMRC has the right to assess the rental profit and charge tax accordingly. In addition penalties can be charged on the undeclared tax, fines for incorrect annual tax returns and finally interest on the tax from the date that it was due for payment.

Mrs_MM

Thanks for all of the positive responses, the flat is actually in Battersea!
A very good solicitor will definitely be required for the conveyancy given the circumstances, but just to clarify the flat wasn't 'sold' to S&N meerly transferred over. A massive tax bill/fines is expected during the sale, exactly how much is yet to be calculated..

many thanks once again, i'll check out the hmrc website

PasturesNew

My friend's in a 2-bed ex council flat..... £600k they are. W2.