Advice on Capital Gains Tax

trooper17

Hi

Need a bit of advice on Capital Gains Tax.

Situation is as follows -

I am one of three children. Parents are both deceased and in the Will it stated that I could live in their house for as long as i wanted before the house was to be sold and proceeds split equally between the three children. (Only myself and my older sister are executors of the estate).

We have now come to an agreement to sell the house but I have some queries on Capital Gains Tax. I am aware that as a sole resident you are exempt from CGT - would this apply to me? (I have lived there for five years since my parents died). As I didn't purchase the house would I still be able to claim sole residency relief and how to prove this?

I also wasn't sure what this would be mean for my siblings - would they then have to pay tax and I would be exempt or could I gift them the money they are owed.

I understand that this is a bit of minefield but would really appreciate anybody's advice/own experience.

Many thanks.

zygurat789

Has the will been finalised?
If not the proceeds from the house will be included and be subject to inheritance tax.
If it has been finalised, when, and who actually owned the property before it was sold?

00ec25

you will not have to pay CGT, you are as you say exempt because you are entitled to full Private Residence Relief (aka "PPR": Principal Private residence or "main residence")

your proof will be that you have documentary evidence of your occupation: eg. council tax bills in your name, utilities bills, name on electoral roll. One assumes these will cover the period from when the property was transferred from the executors to the beneficiaries of the will up to today's date and therefore show continuous occupation by you since probate was granted and the property was "disposed" of in accordance with the terms of the will

However to answer the rest of your question you must tell us who legally is listed as the owner(s) of the property. Under the will was each sibling given 1/3rd ownership? Has that been registered with the Land Registry – this should have been dealt with as part of the probate process.

If the answer is you each share ownership then your 2 siblings do have a CGT liability because they have never lived in the house as their main residence and therefore cannot claim PPR exemption. The gain will be the difference between the probate valuation and the actual price the house sells for. The gain will be split between the 3 of you, you will need to confirm what exact % of the property you each own. One assumes you will be tenants in common and therefore this % will be stipulated on your documentation from the time of the transfer of ownership.

Assuming you each own 33.3% then the total gain will be divided by 3, your share of the gain is exempt, but each sibling will be liable for CGT on their share of that amount. Each sibling will then be allowed to deduct their personal CGT allowance from that total to give a net gain figure. Using 2010 rates each person has £10,100 tax free , so only if their individual net gain gaiun is more than this will each sibling have to pay CGT at 18% or 28% depending on their individual tax position

You can give then any money you like. There is no tax payable on gifts BUT they will still have to pay CGT because it is their share which is being sold since they are legally the owener, you cannot sell the whole house and then gift then “their” share since it is not all yours to sell. The CGT liability will always be theirs and cannot be hidden

trooper17

00ec25 -

In terms of documentary evidence I do have one concern - my mother and i had a joint account of which all utility bills for her house was paid out of. Due to this I have never changed the name on the utility bills are the direct debits still go from the same account - would this go against me in terms of proof? (I still have council tax, electoral roll etc).

With regards to how long I have been the sole resident - I originally lived in my own property and when my parents passed the Will stated that i could live there for as long as i wanted. I 'officially' moved to my parents house when i started renting out my own property approx two years ago. Would it matter that I was not on the electoral roll at the time of probate? Would they need evidence of PPR from date of parents passing/probate?

To answer your question on legal ownership - I have consulted Land Registry and the legal owners are still down as my parents. Why this was not changed during probate I do not know. How would this affect things?

On the will it states that the profits should be split between the 3 siblings... but only two of us are executors. Does this mean the 3rd sibling therefore does not own part of the house and we would have to 'gift' it... or would the notes in the Will override this?

Sorry for all the questions, your answers are very very helpful to me! thankyou

00ec25

trooper17 wrote: »

To answer your question on legal ownership - I have consulted Land Registry and the legal owners are still down as my parents. Why this was not changed during probate I do not know. How would this affect things?

OK it just got more complex and documentary evidence of your residence is rather unimportant given your new info

You confirm probate has been obtained but the key fact is the property remains in the name of the Estate of your deceased parent(s). Therefore, the property is legally owned by the estate not by you, the executors do not “own” anything, it is the estate which owns the property and you, as executor, merely administer the estate.

The executors can sell the property, you yourself as a private person cannot. It can be sold in your capacity as a co-executor but would therefore need to be signed off by the other executor. (Your 3rd sibling is irrelevant in this context)

The liability for CGT as it stands at the moment rests with the estate and the ESTATE will have to pay CGT, therefore what I said earlier is wrong given your new info.
I am sorry to say that the estate has now lost its right to claim the 10,100 allowance (this is removed if the sale takes place more than 2 tax years after the tax year in which the person died)

Clearly the estate is not a person and therefore has no right to claim the PPR exemption as the estate could not reside there as its physical home!

You need to take proper advice as to the best way forward, as executor you can of course still transfer the property ownership as per the will, but you need to confirm who the will said are the owner(s) of the house – who gets the profits from the sale implies it is split 1/3rd each but this is not as precise as saying, for example, “the property is to pass to my 3 children in equal shares”.

If sold by the estate then the estate pays CGT on the full gain without deduction and the money left after paying the tax would then be split 1/3rd each as per the “profits” you refer to in the will.

Someone else will have to explain the implications of transferring the ownership from the estate to the beneficiaries at this late stage, it will not be as simple as my first post,

jimmo

Legal ownership (the name of the bits of paper) is not really that important when you are looking at Capital gains Tax. Beneficial ownership is what really matters.
Take a look here
http://www.hmrc.gov.uk/manuals/CG1manual/CG11730.htm
Hopefully this will become a bit clearer as we go along.
From what you have said in your opening question it seems likely that your mother’s will established a “will trust” and the beneficial ownership of the house passed immediately, on her death, to the will trust and that when the house is sold it will be sold by the will trust. The will trust will then realise a Capital Gain based on the difference between the value of the house at your mother’s death and the net proceeds of sale. The will trust is then potentially liable to Capital Gains Tax on that capital Gain and will be able to divide what money it has left after selling the house and paying the Capital gains Tax, between the 3 beneficiaries.
However, it is also possible that your mother’s will created a life tenancy for you (the right to occupy the house for as long as you wish) but also passing the reversionary interest in the house (immediate ownership of the house subject to its occupation by a sitting tenant who pays no rent, you), and subsequent full rights of ownership after the life tenancy has ended.
It is easy for the layman to think that that your words “proceeds split equally between the three children” mean precisely what they say but I think they are dangerously close to the legal wording for the ownership of a house by a number of people as tenants in common.
I think this link makes the point but you can always browse through to the next page and so on for more detail.
http://www.hmrc.gov.uk/manuals/cg4manual/cg70505.htm
Coming to the actual liability to Capital Gains Tax, if whilst you have occupied the house, you did so as the beneficiary of a trust, there is every possibility that the trust will be able to claim Main Residence Relief or exemption from Capital Gains Tax on the whole Capital Gain it realises by virtue of your occupation.
http://www.hmrc.gov.uk/manuals/cg4manual/CG65407.htm
In other words, there would be no Capital Gains Tax to pay and you and your siblings can each have a 1/3rd share of the sale proceeds.
If you occupied the house as a life tenant, not within the terms of a will trust, then you will still be entitled to main Residence Relief in respect of your own occupation but your siblings are potentially liable on their Capital Gains.
Now! Did you understand all that? How important is it?
I would suggest a good starting point would be to consider how much the value of the house has increased since your mother’s death, but one word of warning. The probate value is set in stone if Inheritance Tax was paid. If Inheritance Tax was not paid the probate value is meaningless.
http://www.hmrc.gov.uk/manuals/cg1manual/cg16251.htm
What figures are we talking about here?
Very, very roughly, if the house value has increased by less than £30,000 since your mother’s death there should be no tax to pay and we can sort it out on this forum.
If the house value has increased by less than £100,000, my guess would be that we can still sort it out on this forum reasonably well. There may be some tax to pay but that could well be cheaper than you seeking professional advice.
If the house value has increased by more than £100,000 then I would suggest that you really need professional advice on the tax issues and counselling on your willingness to risk so much money on a forum.

John_Pierpoint

Perhaps you can post the exact wording of the will.
Why do you get the privilege of living in the house, could it be you who cared for your parents?
This sounds a bit like an Interest in Possession trust (A life interest that a lot of widows used to get when the husbands owned all the house and then died intestate).
For what it is worth my mother was in this position for about 35 years before her death and the Land Registry certificate was in the names of the two administrators (HMRC claimed a bit of a problem finding my father's records;) - but I had kept a copy).

SurreySue

Hello

I'm reading this thread with great interest as my husband is in a very similar position! Please bear in mind that I have no legal training but am just passing on information we have received.

Are you sure that IHT is not more relevant as it sounds like a 'life interest trust' was set up for you and the sale of the property will result in 'gifting' the property to your sisters and thus could be viewed as a PET especially as the trust was set up prior to FA2006 and be subject to IHT taper relief based on you surviving 7 years+.

In my OH's case the house was transferred into the executor's names (himself & his sister) and this may be a vital consideration and the life interest was for his late father's partner to live in the property for as long as she wished.

We have also been advised that the CGT consideration will be zero as you can use your Primary residence relief to cover the whole gain as it was your sole residence.