capital gains tax query

damonsgirl

i have a CGT problem which i would appreciate some advice on.

Several years ago (2002) my mother transfered her house to my sister and me. She had been widowed the year before and wanted, as she put it to safe guard our inheritance. Foolishly neither my sister or i looked into the pros and cons we simply turned up at the solictors office and signed the appropriate documents, at no time did the solicitor mention future tax liabilties etc.

My mother passed away in November 2007, following advise from HMRC helpline probate was not applied for as she had less then £4000 and no other assets. i as executor eventually received a letter from HMRC stating that her tax position was clear and assumed that was that.

The house was sold in October 2008 for £140,000 this was split equally between my sister and me.

i have only become aware that we would appear to be liable for CGT following a conversation with a work collegue who is having problems following the death of his father.

i am now extremely concerned about this and need to clarfiy what i need to do.

i believe that both of us can claim the annual exempt amount of £10,100 and that CGT is paid on the gain between the value of the property at the time of the transfer and the value when it was sold.

my questions are as follows, how would i establish the value of the property in 2002 as i do not know what it was worth at the time of the transfer?

will therebe a penalty for late payment? and if so does any one have any idea how much?

As neither my sister or i actually have the money (we both used it to pay off part of our respective mortgages) would we be able to pay in installments?

an additional problem has arisen in that my sister is stating that she will not pay. she has been advised by a so called friend that as the tax office have not been in touch about the CGT they obviously are unaware of it therefore she would be foolish to volunteer the information, apparently this friend came into money about five years ago in similar circumstances but never paid CGT. as i was executor would i be liable if she fails to pay her half?

sorry for the long winded post but i would be grateful for any advise - this is really worrying me.

thanks

ceeforcat

The first thing is, obviously, the valuation at 2002. It would be normal practice to approach an estate agent or valuer (independent) to obtain a formal valuation. Most will do this for £100 plus VAT or so. It is likely that the CGT will be minimal but post the figures when received.

Your sister is, may I say, talking rubbish. She will be liable for her half not you - your duties as executor would now have expired. (I presume that HMRC were informed of the gift at the time of your mother's death as it should have formed part of her estate even though there would have been no liability)

00ec25

Your role as executor has nothing at all to do with the CGT situation. The CGT liability arises from the fact that you and sister are co-owners but the liability falls on each person individually. HMRC will chase the individual who fails to declare/pay their individual liability for tax evasion, they will not chase you for your sisters debt.

Your sister is true in one sense that it appears you have “got away” with it so far (and maybe your sister’s friend did indeed manage to evade tax a few years ago), but that does not make it legal or right. It is good you have raised this situation and great that you want to sort to out
Be aware that HMRC do check valuations and may challenge any you supply it if they think it is wrong, so as advised best to use a professional valuer for added credibility. (If you want to do it absolutely by the book you could ask HMRC to check the valuation before you submit your tax return but most people don’t and it would add further delay.)

Unfortunately the fact that you have not declared this when you should have means you almost certainly will be charged interest on any tax you are due to pay, but how much are we talking about? House price increase for period 2002 – 2008 was what, only a few % probably and as you appreciate you have your allowance as well.

Re the probate the fact mother lived in the property until death means that it was technically a “gift with reservation” and therefore was still part of her estate for IHT purposes. However, even if you misunderstood this when you did the probate, it does not matter because the figures you quote mean the total estate was still below the £285,000 threshold (07/08 rate) so there never was any tax to pay and you cannot be penalised for any error you may have made if no tax was due anyway.

System

00ec25 wrote: »

Re the probate the fact mother lived in the property until death means that it was technically a “gift with reservation” and therefore was still part of her estate for IHT purposes..

Doesn't it also follow then that it was still part of her estate for CGT purposes too, and therefore received an uplift in value at death, therefore no CGT liability?

I understood that the rules for IHT/CGT dovetailed together?

ceeforcat

Afraid not - one of the most common mistakes! By transferring the house to her children and remaining in it the house formed part of her estate - it would not have mattered if she had lived for fifty years as it was a gift with reservation. However. YOU AND YOUR SISTER are deemed to have acquired the house for CGT purposes and are liable for any gain. By entering into the gift, your mother potentially made the property liable to two taxes - IHT and CGT.

If she had not gifted the house no IHT would have been payable (under the limit). No CGT would have been payable (main residence). Both you and your sister would have received the house and the acquisition value would have been the value at the time of your mother's death. Neither of you would have paid any tax on the sale as the gain would have been below the exemption limits.

Hindsight is a great thing unfortunately.

damonsgirl

Thanks for everyones advice, it has helped put my mind at rest.

I will contact an estate agent re the valuation and having explained everything to my sister i feel i can do no more. I have pointed out to her that by paying my liabilty on half a property i'm asuming HMRC will ask questions as to what happened to the other half so if she has any sense she will pay up.

Yes hindsight is wonderful i only wish i had looked into this properly before consenting to my mother transfering the property but we live and learn

Thanks again.

taxing

Silly question but did either of you live at home with your mum and then still live there until it was sold maybe? Probably not or you would have said, but if applicable could be some of the gain is tax exempt.

Regards

jimmo

Before you pay an estate agent for a valuation please bear in mind that what your mother actually gifted to you and your sister was not a house with vacant possession. It was a house with a sitting tenant paying no rent.
That can have a huge impact on the valuation.
In my days at HMRC the District Valuer used Life Expectancy Tables to determine the value.
For example, if in 2002 your mother was 50 and the life expectancy for a woman was 80 you and your sister would be regarded as having acquired a house that you would not be able to use or sell for 30 years and the value would be pretty small compared to a house with vacant possession.

damonsgirl

taxing-no neither of us ever lived at the property.

Jimmo- thanks for that advice. i had assumed that any valuation placed by HMRC would fall at the lowest end of the scale to enable them to claw as much tax as possible. Perhaps i'm a little too cynical.

System

ceeforcat wrote: »

Afraid not - one of the most common mistakes! --- YOU AND YOUR SISTER are deemed to have acquired the house for CGT purposes and are liable for any gain. By entering into the gift, your mother potentially made the property liable to two taxes - IHT and CGT.

.

Thanks for pointing that out. It must indeed be a common mistake - I have heard it asserted even by people I would have assumed to be pretty knowledgeable.

As a matter of interest, would that still have been the case had the mother retained an absolute right to live in the house for her lifetime, rather than simply living there with the consent of the daughters?