Do I have to tell the Tax Man?

Savvy_Sue

Who is the executor? If it's the solicitor, then you'd hope that they know what they're doing, although I wouldn't bank on that if they sorted out the transfer of the house.

If it's not the solicitor, I'd take advice from either an accountant or a solicitor who is a member of STEP.

bplp

Thanks for all your help, I'm a lot more enlightened now than I was at the start of this thread.

00ec25

bplp wrote: »

What do you think we should we do next?

assuming you do not already have to do a tax return then, once its sold and you have the final figure worked out (including any costs eg EA fees), you simply write to HMRC and tell them your calcualtion and the amount of loss you have incurred.

you should write to the tax office that deals with your PAYE- get the address details from your employer (or off your P60)

jimmo

00ec25 wrote: »

CGT
A sitting tenants who is the parent of the new owner will not affect the value as this is an obvious way to get a lower value and therefore is not allowed to affect the valuation in this specifci circumstance

I am afraid that is totally untrue.
When your dad legally handed the property over to you in 2000 he didn't give you a house with vacant possession. He gave you a house with 2 sitting tenants paying, between them 1p per year in rent.
Try to ask yourself how much you would have been prepared to pay for a similar house in 2000 knowing that you could not move in, or let it at an economic rent, until the sitting tenants voluntarily moved out or, far more likely, died.
That is what HMRC will do.
http://www.hmrc.gov.uk/manuals/cgmanual/CG74220.htm
In fact HMRC want to know the true open market value of an asset at the relevant date and, from a taxman's point of view, the Inheritance Taxman will want to be satisfied that an asset has not been undervalued in the deceased's estate for Inheritance Tax purposes.
On the other hand, the Capital Gains Taxman will want to be satisfied that the same asset has not been overvalued as the acquisition value of the person who is liable to Capital Gains Tax when the asset is actually sold.
My gut feeling, admittedly as an ex taxman, is that the OP is very likely to face a Capital Gains Tax liability when the house is sold.

John_Pierpoint

Ouch, caught in the nut cracker between IHT and CGT?
Let us get back to basics, strictly between you & me and the other 1,000 people who might read your thread, why did you father give you the house? Presumably it was his principal private residence, before it became his amazingly cheap rental.
What became of your mother?
What was your father's IHT position? ie did his estate with or without the 180K value of this property exceed the nil rate IHT band?
What sort of "tenancy" did your father have?
Was there any suggestion that your father was "vulnerable" and in need of physical/mental care?

There used to be a useful CGT free concession for letting a dependent parent live rent free in a house. The very fact that they were being charged NO rent made them dependent. But that ceased for new arrangements made after some date back in the 1980's.

I also once managed to agree, for a very similar arrangement for a great aunt (it was a whole £1 a year), that I was her trustee not landlord, and she had an interest in possession trust that had just ended. Thus I was happy to pay minimal IHT rather than a higher amount of CGT.
However this was the other way round, the intention was to prevent the next generation from seizing her late older sister's house and throwing her on the streets, but probably without giving her the freedom to sell the £8.000 house and go and live in a caravan on the interest. It was thought that the tenancy would be fairly short term as the "tenant" was recovering from a hysterectomy cancer treatment. However she soldiered on for 30 years, died just short of the Queen's telegram and the house eventually sold for a bit over £250,000.

I think you need to have a talk with the solicitor who was involved in setting up this arrangement.

John.

PS
When did the concept of "a gift with reservation" start?

jimmo

John_Pierpoint wrote: »

PS
When did the concept of "a gift with reservation" start?

18 March 1986.
http://www.hmrc.gov.uk/manuals/ihtmanual/IHTM14301.htm

dori2o

00ec25 wrote: »

assuming you do not already have to do a tax return then, once its sold and you have the final figure worked out (including any costs eg EA fees), you simply write to HMRC and tell them your calcualtion and the amount of loss you have incurred.

you should write to the tax office that deals with your PAYE- get the address details from your employer (or off your P60)

Just for information, there is only 1 office to write to now to provide information, submit claims, or for general information (unless you are submitting a tax return in which case the return now goes to Cardiff).

HMRC
PAYE and Self Assessment
PO Box 1970
Liverpool
L75 1WX

Even if you put a different Tax Offices address on the letter it will be redirected to Liverpool as this is now the 'Post Hub' for HMRC.

http://search2.hmrc.gov.uk/kbroker/hmrc/contactus/search.ladv?raction=view&fl0=__dsid%3A&sm=0&ha=34&as=1&sf=&sp_scope=hmrc&cs=ISO-8859-1&tx0=49612

bplp

John_Pierpoint wrote: »

... why did you father give you the house?

A: he was worried that in the future he may have to go into a home and they would take away the house which he felt was all he had to leave to us.

Q: What was your father's IHT position?

A: no IHT with or without the property

Q: Was there any suggestion that your father was "vulnerable"

A: he thought he was, but at the time he was fine

Cheers

jimmo

Well that all seems to be water under the bridge now and under the rules of Self Assessment you have obligations.
Firstly, once the house has been sold you will be required to establish whether or not you have realised a taxable Capital Gain. If you have realised a taxable Capital Gain you have to declare the Capital Gain within the statutory time limit, and, most importantly, pay the tax due on time. If the house is sold in the current tax year, 2011/12 the tax will be payable by 31/1/13.
If you have not realised a taxable Capital Gain but are required to make annual Self Assessment Returns then the rules outlined by 00ec25 in post#2 apply.
If you do not make Self Assessment Returns (and have not realised a taxable Capital Gain) you are not obliged to declare anything to HMRC.
However, if you have realised a loss it could be in your own interests to declare it.
As I said in post #15, my gut feeling is that the valuation you have for the house in 2000 of £200,000 is way over the top. It might well be reasonable as a value with vacant possession, but not as a value with sitting tenants.
During my time at HMRC a few different District Valuers told me that they used the Government Actuary's life expectancy tables in cases like this.
So, in very, very rough and ready terms, if the average life expectancy of a man was 75 in 2000 and your dad was 60 the open market value of the house with him as a sitting tenant could very well have been significantly less than £100,000.
If he was 70 then the open market value might be between £100,000 and £150,000. If he was 74 or older the open market value would probably be a lot closer to £200,000.
Please don't take these figures as gospel. I am trying to illustrate a point.
Turning now to your question of where you go from here my usual suggestion is to go back to the person who advised your father in the first place. However, speaking as a former taxman, I really cannot see any possible reasons behind the original plan for your father to gift you the house and then pay you a nominal sum in rent. It just doesn't make sense to me, and with the rules on Inheritance Tax and Capital Gains Tax, as they were in 2000, that plan was counter productive to your family.
From what I have learned on this forum, the plan was probably counter productive in terms of protecting your dad's house against care home fees as well. This is commonly referred to as "Deprivation of Assets".
I suppose that there could have been other reasons to justify what your father did but if there were, they are beyond my knowledge.
I rather feel that your dad was ripped off by the "professional" who arranged the gift of the house to you and if you seek professional advice now its a question of pot luck whether you get a good one or another rip off merchant.
Don't get me wrong, there are good solicitors, good accountants and even good taxmen but there are rogues in all walks of life. That is probably your real problem.
Similarly for Valuers but in your case my guess is that the professional who valued your father's house in 2000 was effectively asked for an open market value with vacant possession rather than being specifically advised that your parents would continue to live there for the foreseeable future at a nominal rent.
You might also want to consider a Post Transaction Valuation.
Once the house has been sold, definitely not before, you can ask HMRC for a Post Transaction Valuation by completing a CG34..
http://www.hmrc.gov.uk/manuals/svmanualnew/svm105030.htm
The beauty of a Post Transaction Valuation is that you can propose, in your circumstances, a 2000 valuation of £200,000 and negotiate with the VOA without fear of penalty whereas if you assume a 2000 valuation of £200,000 and wait to see if HMRC catches up with you, you will almost certainly face a penalty for making an incorrect return or failure no notify liability.
If you do submit a CG34 I would encourage you to seriously consider engaging a professional valuer to negotiate on your behalf but make absolutely clear to your valuer what you want him to value. That is the value of a house in 2000 with a sitting tenant paying only a nominal rent but having an average life expectancy at that time.
If you can get through to your chosen valuer exactly what needs to be valued then the rest should all fall into place and you will know exactly what your tax bill will be well before you have to pay it.
Apart from the valuation issue its a matter of pot luck. Can you find a good solicitor or accountant who knows the ropes? If so you will have to pay him a pretty penny but may be able to sue him if he gets it wrong.
Do you rely on a forum where the advice is free but if things go wrong you will be on your own?

Savvy_Sue

jimmo wrote: »

If you can get through to your chosen valuer exactly what needs to be valued then the rest should all fall into place and you will know exactly what your tax bill will be well before you have to pay it.

And note that for these purposes the OP will be paying for a valuation rather than relying on the local estate agent. But it should be money well spent, from what you've said.

jimmo wrote: »

Apart from the valuation issue its a matter of pot luck. Can you find a good solicitor or accountant who knows the ropes? If so you will have to pay him a pretty penny but may be able to sue him if he gets it wrong.
Do you rely on a forum where the advice is free but if things go wrong you will be on your own?

which is why I said earlier:

Savvy_Sue wrote: »

If it's not the solicitor, I'd take advice from either an accountant or a solicitor who is a member of STEP.

the OP doesn't need a 'generalist' solicitor, as jimo says, they need one who knows the ropes for this kind of situation (which isn't a 'normal' situation). We can give all kinds of advice, and we may be right, but our advice can't be relied on, especially not anything I say! :rotfl: