CGT and receiving property as a gift

bigmog_2

Hello

I am in the process of recieving a property at below market value (the reson for this is genuine but boring so I'll omit it).

My question is this. The person selling me is selling at 45K where the market value is more like 80K.

I spoke to my solicitor and he said it is fine he can just transfer it and I just transfer the money to them but he didn't know the CGT implications.

Since I'm recieving goods at less than market value do I have to pay CGT now or when I sell? Also would the revenue take a dim view on the seller not selling at market value and want their CGT anyway?

Any help much appreciated.

Regards

Bigmog

johnllew

Are you and the seller connected in any way? And I'm sure we'd be interested in the boring reason for the sale at undervalue.

bigmog_2

No we are not related or anything. We are good friends. The owner has let the flat to my monther in the past few years. She has got to know us well and wants to sell. I am offering to buy it but I can't afford the market value so she has offered to sell it more cheaply.

Hope that explains things.

Any tax advisors out there?

johnllew

If there is no connection between the parties then there is no problem in the transaction being at undervalue. Your allowable cost will of course be the price you pay and so you may well have a larger capital gain when you sell the property. If the property is used as your main residence throughout your ownership however, any gain will be exempt.

MJSW

I disagree, there will be a problem with CGT. Being connected to the seller is just one of the tests for determining whether market value is substituted. Another is where the sale is not 'at arms length'. This is quite clearly a transaction not at arms length, since it is between friends and is at well below the market value. Consequently market value will still be substituted in place of the actual proceeds for Capital Gains purposes, even though the parties are not 'connected'.

However, as far as bigmog is concerned, this will be good news. His base cost for CGT purposes will be the full market value of £80,000. However, this will be bad news for the seller, since her gain will also be calculated based on the full £80,000, despite having only received £45,000.

johnllew

Yes, MJSW is right - here's the Revenue view:

Capital Gains Manual - CG14532

Consideration for disposal: market value rule applies
TCGA92/S17 & TCGA92/S18

YOU USE THE MARKET VALUE OF THE ASSET INSTEAD OF THE ACTUAL CONSIDERATION WHICH PASSED BETWEEN THE PARTIES WHERE:

THE TRANSACTION IS OTHERWISE THAN BY WAY OF A BARGAIN AT ARM'S LENGTH, in particular?

a gift
a transfer into settlement by a settlor
a distribution of assets by a company to its shareholders
the asset is disposed of
wholly or partly for a consideration which cannot be valued, or
in connection with the loss of office or employment or reduction of earnings to any person, see CG16270+, or
in consideration for or in recognition of the services of any person

THE DISPOSAL AND ACQUISITION OF THE ASSET IS BETWEEN `CONNECTED PERSONS' (defined in CG14580+)

WHERE A DISPOSAL IS DEEMED TO TAKE PLACE AT MARKET VALUE,
for example

where a beneficiary becomes absolutely entitled to property as against a trustee
where, in the hands of trustees, assets are deemed to be disposed of and immediately reacquired on the termination of a life interest.

More here in the IR's CGT Manual

Tim_L

There is also a potential problem if the seller goes into residential care - the rules for this are draconian and the investigations can go back years. And this probably becomes a gift under IHT rules too, which lands a potential liability onto the seller's estate if s/he dies.

Obviously most of the problems are going to be the seller's, not bigmog's, but you may not want to land this onto someone who is a friend.

I'm amazed the solicitor didn't know about any of this - most are well aware of taxation and inheritance rules. You need to get advice from someone more knowledgable, I suspect.

thedoc_2

There is also a potential problem if the seller goes into residential care - the rules for this are draconian and the investigations can go back years. And this probably becomes a gift under IHT rules too, which lands a potential liability onto the seller's estate if s/he dies.


I'm amazed the solicitor didn't know about any of this - most are well aware of taxation and inheritance rules. You need to get advice from someone more knowledgable, I suspect.

Hi Folks is there any other info regarding this type of situation that I can get hold of (in plain English preferably)as my mother has only recently given me her house as a gift.

Cheers

lisyloo

Basically if the local authority deems that your mother has given you the gift and has "deliberately deprived herself of assets" in order to gain access to benefits then the whole transaction can be overturned and there is no time limit.

There are no hard and fast rules, but if she dumped her assets the week before going into a home and had no other logical explanation then it's highly likely that the local authority would think it was deliberate.

No hard and fast rules so you have to apply common sense about how it would look to a court.

thedoc_2

Thanks for the above but are there any means to "cover myslelf" in the unlikely event that the worst should happen?

I think its also worth pointing out that I am an only son and only surviving relative and wondered if that would have any bearing on the situation.

Cheers

lisyloo

Thanks for the above but are there any means to "cover myslelf" in the unlikely event that the worst should happen?

The only way I can think of is to plan your financial affairs as if the gift is going to be removed.
I realise that's drastic but I can't see how you could otherwise do it.
The only other way would be to make sure she has bought some long term care insurance.
This will be quite expensive but proves she isn't reying to get it for free.

I think its also worth pointing out that I am an only son and only surviving relative and wondered if that would have any bearing on the situation.

I am not an expert by any means but logically I would have thoought that would have no impact.
The question the court would be asking is "did she deiberately deprive herself of assets to get free care".
It's about HER actions and therefore I would have thought that your status would be totally irrelevant.