Tax conundrum

GuyB65

I bought a house for my son 17 years ago. I paid £15,000 for the house and I spent a further £5,000 modernising it. I have not charged him any rent and I am now going to let him buy it off me for £15,000 even though it has been now valued at £65,000.

I have been informed that I will have to pay Capital Gains Tax on the £50,000 that the house has increased in value as it is not my main home even though I am not actually selling it for anymore than it I paid for it.

If I am not making any money, why do I have to pay tax?

I have also been told that I could get taxed on the rent he should have paid for a property of this value.

Again can I get taxed on money I have not received as I chose to be generous?

The_Unready

Hi,

The HMRC web site says the following when explaining how to work out your capital gains:

"When to use market value - some examples:


You use the market value of the property instead of the sale price if, for example:

• You give the property away.
• You intentionally sell or dispose of the property for less than it's worth.
• You sell or dispose of the property to a 'connected person', such as a close relative or a company you control."

Hope this helps.

The Unready

G_M

Yes - Capital Gains exist so are declarable for tax purposes. (Either you or your son will benefit from the gain in value!).

No - income tax is not payable on rent that was not charged.

00ec25

GuyB65 wrote: »

If I am not making any money, why do I have to pay tax?

in the old days when CGT rate was the same as IHt rate (both 40%) then a coommon way to avoid IHT was to "sell" assets to the children for nominal amounts and thus bypass IHT as the asset was no longer part of the estate

therefore the connected person rule was invented to close that loophole, it has never been changed, and what you propose is exactly why it is still in place, even though IHT allowancnes are now much more generous and the CGT rate is lower, ypu are tranferring part of your wealth to your children outside of the IHT envelope and so should be taxed accordingly

GuyB65

And there was me thinking Tax is normally pretty obvious, well unfortunately on this occasion that happens to be true as well it just seems a little unfair to be taxed on unrealised assets but I can now at least see why.
Thank you to all of the contributer's, this site is amazingly helpful. I had been quoted £150/hr to talk to a tax expert about this very issue.

anselld

You could do it over a number of tax years... Give/sell part share away annually so that you do not exceed your CGT allowance in each tax year. eg 5 shares, £10k gain per share.

It would obviously take just over 3 years from now though.

Brock_and_Roll

Surely given that this was 17 years ago, indexation relief will whittle any CGT payable down quite a bit? Have a look at the HMRC indexation tables:

http://www.hmrc.gov.uk/rates/cg-indexation-allowance/index.htm


An asset bought in June 1995 has an index of 0.589.

Assuming you have no other capital gains in the year the property is sold, your CGT allowance (£10,600) reduces the taxable profit to £39,400. Then applying the indexation factor, this reduces to £23,206. With the tax rate of 18%, this ends up with a liability of £4,177 which could be worse.....

RabbitMad

I doubt he is a corporation so indexation does not apply. Capital gains will be a flat rate of 18 or 28% based upon income.

Ideas:
1. Sell to son at £15K plus your tax bill?
2. How old are you, how rich are you and what is your health like (are you going to snuff it in the next couple of years) could you just leave it to your son in your will?
The reason being is that if you sell for £15K you will be hit for CGT, if you then die the difference in sale price vs value will be liable for IHT. If your son was to move out and rent the property out then in the future they have a £15k base price for CGT calculations where as if they inherit they will inherit at its market value.

I think you'd be best place taking professional advice (assuming you are actually wealthy enough) and talk to a tax mitigation expert.

SuzieSue

The following link is worth reading, however it is quite old and so some of the CGT rates and rules have changed but the basic principles are still the same.

http://www.thisismoney.co.uk/money/experts/article-1603648/Can-son-buy-our-home-at-low-cost.html

00ec25

SuzieSue wrote: »

The following link is worth reading, however it is quite old and so some of the CGT rates and rules have changed but the basic principles are still the same.

http://www.thisismoney.co.uk/money/experts/article-1603648/Can-son-buy-our-home-at-low-cost.html

for instance
- taper relief is now abolished
- letting "exemption" (as described) is not availble unless you move in and attain PPR status
- refernce to PPR requirments is correct