Capital Gains Tax on Inherited House

geoiain

Hi

I'd be really grateful for some simple and straightforward help in understanding how CGT works with regard to a second home, as all the examples I can find seem to have complications such as rented out etc.

I own my own house and have lived in it for 12 years in England. On the death of my father in April 2012 (in Scotland) I have inherited his small house, probably worth around £80,000.

My current taxable income is approx £28000 p.a. From what I can work out, if the house in Scotland sells for £80,000, then I can deduct £7000 (allowance of £35,000 - £28,000) and then deduct £10,600 CGT allowance (last year's amount), leaving a net gain of £62,000. What I can't work out from the examples is, do I pay CGT at 18% or 28%? Please please correct me if my calculation is wrong.

I have been a tax payer for all of my working years, currently 40, however when I read about the ways that the rich & wealthy seem to be able to avoid paying their full share, I feel obliged to investigate other options.

If I nominate the house in Scotland as my main residence and open up a bank account, pay utilities, council tax etc, and even spend some significant time there, how long would I have to live there to make it worth while? Or is it as simple an equation as the longer I'm there the less I pay in CGT.

Also, what would happen if I 'lived' there for a year, sold it, came back to live in my house in England and then sold that one a few months later?

I fully appreciate that some of these questions may have been answered elsewhere, but I've struggled to find a simple example to compare.

Thank you in advance.

ceeforcat

Way wide of the mark in many areas I am afraid. Firstly - you are allowed to earn 42475 before you pay higher rate tax (8105 personal allowance plus £34370 basic rate band). You have £14475 remaining of your basic rate band. Any Capital gains chargeable under this amount (after deduction of your annual exemption of £10600) will be taxed at 18%.

However your base 'cost' in simple terms will be the value at the time of your father's death (assuming no complications but you asked to keep it simple). You appear to believe incorrectly that your cost is 'NIL' You have an annual exemption of £10600 this year. This means that the property proceeds will, after selling costs, have to be more than £10600 above the value at death before you will pay any Capital Gains tax. Nothing to worry about, it would seem.

geoiain

Thank you so much for clarifying it. I went back to the HMRC website and I guess the crucial section is the 3rd bullet point of Step 2 of "How to calculate capital gains and losses on property", i.e.

Step 2: Work out how much your property cost The cost of your property is normally the amount you paid for the land, building or lease when you bought or acquired it.
However, sometimes you may need to use the market value of the property instead of the cost.
Using market value - some examples

You use the market value of the property instead of the cost if:

• You owned the property at 31 March 1982 - you use its market value on that day.
• It was a gift made after 31 March 1982 - you use its market value when it was given to you, unless there's been a claim for Gift Hold-Over Relief (see the link below). Or see the section below if it was a gift from your husband, wife or civil partner - special rules apply.
• You inherited it after 31 March 1982 - you use its market value on the date of death of the person who left it to you.

Once again, thank you so much.

Mikeyorks

geoiain wrote: »

you use its market value on the date of death of the person who left it to you.
.

If Probate (Confirmation - in Scotland) had / has to be obtained at the time - then the market value will have been determined and filed as part of that process.

jimmo

You might want to delete that Mike. Probate Value means nothing for Capital Gains Tax if it has not been ascertained.

Keeping it “simple” it would be better to leave it as market value on the date of death.

If you delete yours, I’ll delete mine.

geoiain

Thanks for your posts. In fact I'm having a Home Report produced in a couple of weeks and I believe that that will give the market value, which I now know (thanks to ceeforcat) will be my 'base' cost.

getmore4less

This is a recent death if you are selling immediately then why not sell out of the estate then if sold relatively quickly it just forms the estate for IHT and there is no CGT to consider. saves the land registry costs to asent the property

John_Pierpoint

It is a gamble, when IHT at 40% is payable.
In the run up to the credit crunch the property would almost certainly have gone up in value between death and sale (say) a year or so later.
The best advice then was to get the beneficial ownership into as many names as possible and then sell it. With a bit of luck each individual would have had their CGT nil rate band available. Today perhaps you want to keep it within the estate for up to two years, so you could reclaim the 40% IHT made on the loss?

geoiain

Once again, thank you for the responses. According to the lawyer (and co-executor with me) handling the estate, in Scotland nothing can be taken out of the estate for 6 months - I don't know if that's the same in England? IHT is not a problem. Unfortunately the house needs quite a bit of cosmetic work on it before I would consider selling it. In the current climate it is extremely unlikely that the decorating I will do will raise the value by more than £10,600. And as I understand it, I can also offset the selling costs against the 'profit'.