A question broadly around Principal Private Residence relief

huzzer84

Hi, I'll firstly set out my scenario:

My parents divorced four years ago. For a number of reasons, including stability given that I was starting a new job, I bought my dad's half of my parents' home, and so now own the property with my mum as tenants in common (with a small mortgage remaining).

I am getting married in 2 years time, and projecting our finances forward, my fiancee and I should have enough cash to buy a new house together, having by then also paid off the mortgage on the previous home.

I intend to allow mum to live in the current property as long as she needs it, which will hopefully be for decades. I am her only child and her view is that it's "all yours in the end anyway".

I understand that my eligibility for PPR will diminish on the first property each month, and will eventually become significant with rising house prices, even considering the annual exemption and the fact I only own 50% of the house, the gain will likely be chargeable at 40%.

Clearly an option would be to gift the house to my mum (though I appreciate I cannot guarantee she will gift it back in the event of her death before mine). In this event, her estate would presently be below the IHT threshold.

However, what if I do this, then mum at some point needs to be taken into care and her money used to pay for those costs (and 'my' 50% is lost)?

Is there another way? Or does it look like the best option is to just sit on and plan for a potential gain in the future? For some context, I am 26 and mum is 53.

John_Pierpoint

We need some figures on the value of the house and perhaps mum's total estate value for IHT purposes..
For as long as you keep it your half of the house will always be yours, unfortunately the CGT free allowance for keeping a roof over the head of dependent relatives went many years ago (for new cases).
As things stand your potential risks are mum getting remarried or needing care.
From her point of view the risk is that you might go bankrupt.

huzzer84

As I said, IHT is not an issue - house value is around £160k and neither of us have significant other assets.

As I see it, sitting on a potential future CGT gain is likely the least of a bad bunch (given risks of gifting half to mum), but am just wanting to check that no one has any better ideas?

jimmo

I am struggling to understand your problem because, on another forum, you said you are an accountant.
https://forums.moneysavingexpert.com/discussion/comment/37141534#Comment_37141534
On this thread you suggest that your Capital Gains will be chargeable @ 40% whereas, at the present time, the maximum rate for Capital Gains Tax is 28%.
http://www.hmrc.gov.uk/rates/cgt.htm#4
You also say that neither you nor your mum have significant other assets but, at the same time, you anticipate that you and your fianc! will have sufficient cash to buy a house within the next 2 years.
I can’t speak for other contributors on here but I see you as a wind up merchant.
Prove me wrong and I will do my best to help.

huzzer84

Yes, I'm an accountant, but that doesn't mean I have a great understanding of personal tax issues - as I work for corporate clients - hence why I'm asking for help. OK, the 40% was clearly a mistake (though don't rule out 40% in the future, when the gain may crystalise, given the current political climate), but that's not the point - 28% of a large gain could still be a considerable sum.

Is a £30k-£40k deposit on a second house a "significant asset"? Sorry if it is, but I thought that the IHT limit was over £300k. Yes, this could majorly change 20-30 years down the line when the mortgage on the 2nd property (potentially current value £250k) is paid off. But the point I was making that mum will likely not pay IHT - I don't see what the issue is with my assets - I'm just trying to save myself some CGT. My point is that if mum will not pay IHT, then gifting her my half would mean no CGT or IHT to pay.

Presume in 20 years time the 1st house is worth £300,000. That's a £140,000 gain, so £70,000 on my half. Say annual exemption is now £15,000, meaning £55,000 is chargeable. At 28%, that is a £15,400 tax charge - surely worth worrying about now if I can do something about it?

I'm sorry if I don't sound convincing, but I'm quite surprised about the inquisition.

As I see it, gifting means no CGT or IHT, but has the problems of mum remarrying or needing care - as John points out.

Doing nothing and sitting on a CGT gain would mean a future cost (depending on changes in tax legislation), but is otherwise a safe option.

I was just wondering whether there is another way?

Pennywise

Finally,some figures to work with. Sometimes on these fora it's like pulling teeth to actually get to what matters!

You havn't included your PPR exemption - if you lived in the home whilst you owned half of it, you get PPR for the number of months you lived in it and also a further 36 months free. So if you end up owning it for say 20 years, lived in it for 2 whilst owning half, you're gain will be reduced by 5/20ths. PPR never goes away - it just gets eroded by time as the number of years you don't live in start to get increasing larger compared to the number of years you did live in. Apply your PPR circumstances to see how things look.

A CGT bill, of say £10k to £20k may seem harsh, but there's no guarantee house prices will continue to rise at recent rates, so the gain may be a lot less than you hope. Tax of £10/£20k is a lot more palatable than the risk of losing it all if she remarries or the house value has to go towards care fees.

Anyway, as an accountant (presumably you are a qualified accountant), your studies should have led you to other tax planning options such as transferring half of your half share to your new spouse (to get two lots of annual CGT exemptions), or the prospect of letting the house once your mother dies or goes into care, to get lettings relief. There are also other options to cover her for care home costs such as equity release, insurance, etc. I'd also be wanting to check in case "giving" her your half share causes an income tax charge (pre-owned asset rule) or may even be ignored for tax as a gift with reservation of benefit - so much to consider. You really do need to engage an accountant who does this kind of thing day in day out, and probably also a solicitor - it's definitely not the sort of thing for a d-i-y'er asking on a forum - the risks of it going wrong are too great!

huzzer84

Apologies for the lack of information at the outset. My studies may have led me to those options when I was actually studying, but alas as I said I'm now 100% embroiled in corporate matters (and we have a separate tax department to deal with even the slightest more technical issue!), that I have overlooked an idea like transferring half of my half share!

By the time we move into our new house, we are looking at 6 years, plus the 36 months free, so I guess the PPR exemption isn't as small as I had in mind.

However, does the PPR exemption extend to the 22 years that I was living here before I took any equity ownership? I presume not?

I would also suggest that my fiancee, while in essence is living with me and has been doing so for those 4 years, still has bills, etc sent to her mum's place down the road, so giving her half of my half may well lose some of that PPR exemption - but worth thinking about as we're staying here for 2 more years, so could be worth a switch - thanks for the suggestion.