CGT on inherited property

shraga

I have posted elsewhere regarding an IHT query. I repeat the background below.

"I am in need of some quick advice. My mother passed away some years ago and left everything in her will to my father. The only exception was some small gifts to registered charities. My father has now been diagnosed with a terminal illness and it is estimated he will die this year (I am sorry to be so matter of fact but this is the business end of the situation)...

My father's house is worth around £650K give or take."

Ignoring IHT for now (there are other assets) I am now planning for CGT. My siblings and I plan to sell the house shortly but we recognise that that may take some time. During that time period there could be a capital gain. The house is in a nice area and given the incentive to pick the lowest sensible valuation for IHT purposes this makes a capital gain more likely.

As a result I am planning on transferring half of my share of the property I inherit to my wife so that we can both take advantage of the annual exemption. I am a higher rate tax payer, my wife is a standard rate payer. I presume any such transfer must be documented via the land registry? Also, when we dispose of the house to the new buyer would it be possible to do this in two phases so that the first disposal takes place at the end of this tax year and the second disposal at the beginning of the next tax year. That way we would take advantage of two annual allowances?

CLAPTON

You dont own a house to sell

Savvy_Sue

CLAPTON wrote: »

You dont own a house to sell

that is an excellent summary.

Remaining businesslike, your father has time to take advice on organising his affairs.

I am no expert on CGT, but your suggestion for phasing the sale over two tax years raises many questions in my mind. Would a complete stranger be willing buy half a house with a view to buying the second half in a week's time? What happens if it goes wrong in that intervening week?

I know that what you're proposing wouldn't help for reducing stamp duty.

John_Pierpoint

This is a very grey area.
Forget the "selling half a house" idea - that does not work even with a pair of candle sticks.
HMRC has a catch all power that says if a transaction can only be justified on the basis of saving tax (ie it has no commercial logic) then it can be ignored.
There is some evidence that this is being used to catch gift transfers to a spouse followed by a sale within the same year.
I have seen no evidence on here of post death changes to the will within 2 years being similarly attacked. (known as Instrument of Variation or deed of family arrangement or Deed of Variation) but one of these is likely to cost £500 - £1,000.
Similarly the house legally belongs to the executor. IHT has to be paid and then the probate granted. Only with the certificate granting probate, can the executor consider selling land or transferring it to the beneficiaries (assuming the will does not give instructions for its treatment).
Back in 2004, my sister and I (as joint executors) simply collected a form from the local office of the Land Registry and paid a fee (about £150 if I remember correctly) and voila we had a house owned by two siblings as tenants in common - then we sold it. However both HMRC's procedures and those of the Land Registry have changed since then.

There is a school of thought that says as soon as the executor gets probate, the executor writes to the beneficiaries informing them that there is a property of probate value (say) £650k, held in what is now a bare trust and the beneficiaries then decide what they want to do with their real estate.

However more or less all legal land ownership changes now have to be registered, and if the house sells for less than the probate value then the loss can be claimed for refund of IHT; so I can see issues with the solicitor selling the property getting "confused" about how to distribute the value of the property.

Basically you are trying to play "heads I win and tails you lose" against HMRC (and their Valuations Office Agency) and I know which side has more experience.

So you need up to date advice on current procedures, which I cannot give you - If push comes to shove, you cannot afford to go for a ruling to the House of Lords:D

ceeforcat

' pick the lowest sensible valuation for IHT purpose'

How does one propose to do this?

System

Putting it bluntly, as we apparently are in this thread, do you plan to sell his house before he dies or after?

If he sells it there will be no CGT, assuming it is his principal private residence.

If you inherit it and then you sell it there will only be CGT on any increase in value between death and sale.

If you inherit it and then live in it as your principal private residence then there will be no CGT when you eventually sell it.

But this is all hypothetical. At the moment it is his house, he is still alive, and he can do what he likes with it.

purple_haze

John_Pierpoint wrote: »

HMRC has a catch all power that says if a transaction can only be justified on the basis of saving tax (ie it has no commercial logic) then it can be ignored.

I must confess I've never come across this power. Presumably it was given to HMRC by Parliament - can you point me to the statute?

troubleinparadise

And HMRC now regularly check Probate house valuations (even those from established Chartered Surveyors, rather than the "mean value of 3 estate agents valuations" variety) with the District Valuer - I think they might be wise to the possibility that some people try to avoid paying IHT or CGT tax occasionally ......

CTA_2

purple_haze wrote: »

I must confess I've never come across this power. Presumably it was given to HMRC by Parliament - can you point me to the statute?

Correct me if I am wrong, but i think John is referring to Ramsey here and Furniss v Dawson. The waters are muddied so much if this is the case and I would always seek professional advice on anything regarding those matters.

That being said, I wouldn't have anticipated a transfer of property to a spouse to fall within Ramsey. I would call that tax mitigation rather than tax avoidance and the Duke of Westminster ratio still applies to mitigation.

shraga

Dear all,

Thank you for your support. I made an omission in my original posting and I should have added that my father wants to transfer his house to his siblings prior to his passing to avoid getting caught up in probate and to reduce the eventual cost and complexity of probate. Therefore we will have a property to sell!! That said nothing will be done to the house until he has passed away! Therefore the thread title is wrong since this is a gifted property and not an inherited one. Sorry for the mistake.

I called HMRC CGT helpline and they said a valuation from a local estate agent is sufficient to set the value of the house for CGT pruposes. Anyway we will get numerous of those and eithe ray we will pay tax through both IHT and CGT! Of course if we have numerous quotes we don't need to submit them all?

I of course want to reduce any CGT payable and am interested in having my share of the property transferred to my wife and I to take advantage of the two annual allowances and as mentioned above, splitting the sale over two years. It seems the second option doesn't have much legs on it. I presume the first is sensible though?

Savvy_Sue

shraga wrote: »

Thank you for your support. I made an omission in my original posting and I should have added that my father wants to transfer his house to his siblings prior to his passing to avoid getting caught up in probate and to reduce the eventual cost and complexity of probate. Therefore we will have a property to sell!! That said nothing will be done to the house until he has passed away! Therefore the thread title is wrong since this is a gifted property and not an inherited one. Sorry for the mistake.

To be honest, I am not sure this is going to save anything on the eventual cost and complexity of probate, but I'm no expert. Actually, I'd have thought doing it via probate would be easier, although I'm no expert.

If you go via probate, the executors will be responsible for the sale. They decide what price to accept, what work to do beforehand, who to market it with etc. They may choose to consult the eventual beneficiaries, but the decisions are theirs.

If your father gifts the house prior to death, presumably you end up with a house co-owned by several people, and when you come to sell it everyone has to agree (or they can block the sale). I think everyone has to sign everything too - not necessarily in one place at the same time, and possibly there are ways round this, but it's more hassle.

If there are fewer executors than beneficiaries, however much the beneficiaries love each other, I'd wait for probate ...

shraga wrote: »

I of course want to reduce any CGT payable and am interested in having my share of the property transferred to my wife and I to take advantage of the two annual allowances and as mentioned above, splitting the sale over two years. It seems the second option doesn't have much legs on it. I presume the first is sensible though?

Maybe, from a tax point of view, but tax is never the only thing to consider.

I am sure you and your wife love each other very deeply, and neither is contemplating leaving the other, nor likely to die imminently. But stuff happens, and once you give her your share of that house, it's hers, to do with as she likes.

If she has children who are not also yours, she can leave it to them. If you have children who are not hers, she can NOT leave it to them, even if you expected her to do so. If you die / divorce and she re-marries, she may leave it all to her new husband and any of his children (and if she fails to make a will after re-marrying that's where it'll go in any event.)

Heck, she can leave her share to the cats' home!