Cgt & iht

WarriorPrincess

I'll try to keep this short, but its complicated. If it would be better posted elsewhere on MSE, please let me know where it should be.

My OH's dad is 88, extremely frail and ill, and with advanced Alzheimer's. He could die any day, or could last another year. OH & bro have Power of Attorney. Please don't complain that we're wishing Dad dead. That's absolutely not the case - we've put huge effort into enabling him to remain in his own home and to make the life of a very old man as comfortable as possible.

Dad owns a valuable flat - worth easily over the IHT threshold - which he lives in with full-time resident care. He also owns the lease to another flat in the building - this lease is very valuable because it has only 25-years to run. Dad has a significant pension, with which OH & bro pay his living and care costs - he has no other assets.

The owners of the other flat want to extend its lease, which (unbelievably!)will result in a payment in the region of £500k. Valuers & lawyers for us & the flat owners are currently negotiating the precise price.

Dad has owned the lease for over 50 years, so its value when he first owned it would be negligible in today's money.

If the lease payment comes through while Dad's still alive we think it will be eligible for Capital Gains Tax (28%) and then the balance will be eligible for IHT (40%) after he dies - a total tax payment of £284k If the lease payment comes through after he dies, we think it will be eligible for just IHT - a total tax payment of £200k, so £84k less.

If right, this is an absolutely huge difference. Does anyone know whether this is right, or is there something we've misunderstood / missed?

Savvy_Sue

This is the kind of area where I'd recommend paying for proper advice (which I believe you could claim from Dad's finances under the PofA). I think I'd recommend speaking to an accountant or solicitor who's registered with STEP.

The reason why I say this is because under the PofA the attorney is obliged absolutely to act in the best interests of the person they are acting for, not their heirs and those who will benefit from their will. There's an argument to say that getting the lease payment in before he dies is in his best interests, maximising his assets.

However, it may be possible for the attorneys to re-write Dad's will to make it more tax efficient. If not, then after his death a deed of variation can be done, if all affected beneficiaries agree, within 2 years of his death. But knowing what needs to happen is the first step.

I know nothing about CGT and the ways of minimising that - if any. But with the sums involved it would be foolish not to get proper advice - the kind you can rely on, ie the kind you can sue someone for if they get it wrong.

chrismac1

I totally agree with this last post by Savvy_Sue. Professional advice covered by Professional Indemnity Insurance is what you should go for. These things can get sticky when they go wrong. As in Paven v Bevan Ashford in late 2011, when the claimant successfully sued a solicitor for not acting in her best interests in giving advice, part of which was given in a free consultation half hour when they were not even a client. Off the cuff advice on a website is not the right place for you to get peace of mind.

getmore4less

Tax Specialist advice needed should be done as part of the negotiations.

Do you mean dad owns the freehold and the lessee wants to extend.

I think,

After death it will be a CGT calculation on the lease extension, getting the freehold into as many names as posible might be an option(multiple CGT allowances).

IHT applies on estate value at DOD. so if over the nill rate band as smallas possible is probablr best.

Is there a spouce nill rate band to be transfered?


lease extentions get special calculations for calculating the gain it is not just the amount paid.
http://www.hmrc.gov.uk/helpsheets/hs292.pdf

more reason to get TAX advice.

WarriorPrincess

Thank you to everyone who's taken time to reply. I'd hoped to clarify whether GGT liabiliity is replaced by IHT liability if the asset isn't sold before the owner dies. I think this is the case - I'd still be interested to know if anyone knows more about such a situation.

Although dad's property makes him very wealthy, he has no money left at all. He's borrowing from a friend (well, his executors are, on his behalf) to supplement his pension so he can continue to live in his own home. Paying for tax advice would be possible - but not easy. And the whole situation is bound about with family stresses. We're not going to rely on / act on advice from MSE without checking it out fully - but we'd really appreciate it if anyone can give us more info on this question.

jimmo

Yes.
If the lease is extended before the owner dies, the owner will be liable to Capital Gains Tax and, the net proceeds of the transaction will form a part of his estate for Inheritance Tax purposes as well as the much reduced value of the extended lease.
If the owner dies before the lease is extended the full value of the un-extended lease will be a part of his estate.
The new owners of the un-extended lease will acquire that at probate value and their Capital Gain is likely to be minimal.
Incidentally, do you realise that if the current owner extends the lease his Capital Gain will be based on the value at 31 March 1982 if that is later than his original acquisition.
http://www.hmrc.gov.uk/manuals/cgmanual/CG16700.htm

getmore4less

CGT and IHT are mutualy exclusive

Unrealised capital gains are replaced by an IHT assesement at DOD.

gains relaised before death like the lease extention still get a CGT assesment.

Creating debt against the estate to live off reduces the IHT liabilities.

Remember there is the value of the second flat(that will change with the lease extention) to consider.

Looks like you need an 1982 valuation as well as before and after lease extention valuations to do a before and after DOD total tax.

Savvy_Sue

WarriorPrincess wrote: »

Although dad's property makes him very wealthy, he has no money left at all. He's borrowing from a friend (well, his executors are, on his behalf) to supplement his pension so he can continue to live in his own home.

All of this being way over my head, I'm going to ask a couple of questions which occur to me as worth investigating for possible solutions to this part.

The first is that regardless of the tax issues, isn't it a good idea to sell the lease ASAP if this will ease the living and care costs difficulties? Obviously without knowing the numbers I don't know if this will help much or not.

The other is these schemes where you borrow against the value of the property the person is living in: I KNOW that there are pitfalls, and I KNOW that these are not necessarily a good solution if the beneficiaries of the will actually want to inherit The Property. And I don't know whether you can do this with a flat rather than a house.

I could well be missing something blindingly obvious here, but since debt on the estate reduces the IHT liability, then personally I'd feel more comfortable borrowing against the estate rather than borrowing from a friend.

I wonder if Age UK and Counsel and Care would have useful information on their websites, particularly about the borrowing against the property idea?

getmore4less

Still don't understand the terms being used.

IUII normaly the freeholder is the true owner and gives leases

Short leases are usualy worth less than long ones, but the freehold is worth more as the lease reduces.

the holder of a lease pays the freeholder to extend the lease.

Unusual to have freehold flats?

WarriorPrincess

Savvy_Sue wrote: »

regardless of the tax issues, isn't it a good idea to sell the lease ASAP if this will ease the living and care costs difficulties? Obviously without knowing the numbers I don't know if this will help much or not.

That would definitely be right if dad was going to live for some time. Borrowing could be paid off and living & care costs would be covered for years to come. But I can't emphasise enough how very frail he is. The worry - confirmed by Jimmo & others here - is that if he's paid this vast amount of money for the lease extension & pays CGT on almost all of it, then dies a few months later & IHT is due on what's left, the total tax bill would be tens of thousands bigger (maybe over £80k bigger:eek:) than if the lease extension payment didn't happen till after he dies.

Now that this seems to be confirmed, we need to establish if there's anything to be done about the situation.

Savvy_Sue wrote: »

The other is these schemes where you borrow against the value of the property the person is living in: I KNOW that there are pitfalls, and I KNOW that these are not necessarily a good solution if the beneficiaries of the will actually want to inherit The Property. And I don't know whether you can do this with a flat rather than a house.

I could well be missing something blindingly obvious here, but since debt on the estate reduces the IHT liability, then personally I'd feel more comfortable borrowing against the estate rather than borrowing from a friend.

Following previous questions on MSE, & much investigation of equity release schemes, we decided we wanted to avoid this if possible. Instead, a friend is lending dad money (interest free) under a fully legally documented arrangement under which the loans become repayable from his estate once he dies. So the expenditure on dad's care reduces his estate for IHT, but there will be no scary equity release company insisting his flat is sold quickly to repay money borrowed against it.

This seems to be working OK at the moment - though we've been advised that it shouldn't go on too long. But, unfortunately, that isn't very likely.

getmoreforless - I've probably got the terms wrong, causing confusion. Dad owns the building's freehold - the other flatowners own the lease to the 2nd flat, obviously, but as the lease is v. short, they will have to pay a humungous lot of money to extend it.

jimmo

I hope you don’t mind me saying this but to have any chance of getting useful advice on a forum you have to let go and try to not use legalese that you don’t understand and just state the position in plain English.
From your post at # 10 it seems fairly obvious to me that your OH’s dad owns the freehold of a single building which maybe was at one time was a house but now consists of a single building containing two flats.
If I have guessed right I would be confident of being able to help regarding Capital Gains but if I have guessed wrong I may unwittingly post a load of nonsense leading you in the wrong direction.