CGT on inherited property

CLAPTON

shraga wrote: »

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?

tax is all about detail.

if you want decent advice you must give the full facts and give them accurately


1. siblings means brothers and sisters... is he giving the house to his brothers and sisters or is he giving the house to his children?


2. what approximately is his total estate worth


3. you fully realise that unless he lives for 7 years after the gift, the full value of the house will be included in the estate for IHT purposes so there is no tax savings by making the gift.

4. you fully realise that if you wait until his death then there will be no cgt (only IHT) so by making the gift you may well pay more tax overall.
Having said that, in the current market there may be no rise in the price anyway so no cgt.

00ec25

just to echo Clapton's post father transferring the property so close to his death (sorry to be blunt) since, I assume, it remains his main home is classed as a "gift with reservation"and therefore the IHT rules mean the transfer is ignored unless he lives for 7 years.

As that is unlikely (sorry to be blunt) you are now setting yourselves up for the classic double whammy encountered by people who have not taken proper IHT planning advice - father's estate will be liable to IHT and you, as the new legal owner, will be liable to CGT when you eventually sell it. So the same property could be taxed twice if father's estate is over the IHT limit

John_Pierpoint

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?

Jimmo, where are you when we need you?

There are several threads on here, complete with links to accountants' web sites, about HMRC challenging property transfers to spouses, after the decision has probably been made to sell it, however much the deed says you are doing it for love.
That probably explains the questions about when was the property first offered for sale.
In my opinion this is "mission creep" but I think that about IR35.

So I will let purplehaze take the land transaction to the House of Lords for a definitive ruling.

Savvy_Sue wrote: »

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 ...

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!

Hi Sue,

Your postings are normally spot on but I think this one needs a little more analysis.
Assuming we are talking England and Wales, because Scotland has its own laws that may vary, only 4 people can legally own the same plot of land. This limitation means we don't get into the French mess, where the whole family own a sliver of the family farmhouse. There they are all bickering amongst themselves, when the roof falls in.

In this situation we are probably talking about a group of siblings and their spouses owning the property, after probate, as tenants in common.
Probably this will be as a trust for sale, ie the equitable owners have a right to share the proceeds of the sale, not a right to hang onto the to the bricks and mortar. Hence my observation about the executor becoming the bare trustee for the beneficiaries, once HMRC has accepted the IHT position and allowed probate to be granted.

Now turning to the mechanics of trying to minimise the value reported, as at the date of death for the purposes of IHT.
We now all have access to Land Registry indexes; though, only the prices based on "normal" willing buyer, willing seller, and in the last 10 years we have gained access to the sale prices of individual houses in the street.

When I sold grandmother's house, occupied by great aunt on an interest in possession trust (ie the right to remain in residence for life), as trustee I was free to sell it BUT it still carried an IHT liability.
So I sold it and then indexed backwards 12 months to the date of death to get a valuation for IHT. In the 1990's prices could be purchased from the Land Registry averaged by post code provided there were at least 3 houses in the calculation. I found myself conducting a reverse auction with a hard nosed woman from what is now called the Valuation Office Agency. We haggled and eventually decided to split the difference before metaphorically shaking hands on the deal.
She had problems accepting that the 12 months I had delayed (and the wonderful paint job I had done to the front elevation:D) had added £50k to the value. As the amount of IHT was trivial, it did not make sense financially to haggle professionally.

Now we can all log onto (say) Zoopla and play the VoA at its own game.

House valuation is an inexact science and you just might be able to smuggle a development opportunity through IHT (at 40%) to get it taxed for CGT (at 28%) after some nil rate band allowance(s) have been deducted.

The problem can be that an old person's house may well be looking very tired and the task is persuading the VoA that it really is (say) 15% below the street average and that is before allowing for its unused development potential.

Only last week, that nice Mr Cameron increased the value of an unimproved pensioner's home by promising it the right to a rear extension of 6 meters (terrace & semi's) or 8 meters (detached).

These factors can make a large financial difference to a valuation in a
area of high demand and that is before taking in local factors such as views and schools.

How much to spend, getting a chartered surveyor to argue your case, is a difficult decision.

getmore4less

00ec25 wrote: »

just to echo Clapton's post father tranfering the proeprty so close to his death (sorry to be blunt) with the belief that it will take the property outside of probate is fundamentally wrong - this is classed as a "gift with reservation" since, I assume, it remains his main home and therefore the IHT rules mean the transfer is ignored unless he livs for 7 years.

As that is unlikely (sorry to be blunt) you are now setting yourselves up for the classic double whammy encountered by people who have not taken proper IHT planning advice - father's estate will be liable to IHT and you, as the new legal owner, will be liable to CGT when you eventually sell it. so the same property could be taxed twice if father's estate is over the IHT limit

The property is outside probate but not IHT, they are different.

Probate and the other variations) are the legal right to deal with the assets, the house would no longer be an asset of the estate.

The value of the house would be included* in the valuation of the estate for any IHT and for probate to be granted the IHT will need to have been paid OR a payment plan agreed with HMRC.


Transfering the house before death has risks as above however in a a stagnant falling market it may work out as the value at gifting for future CGT might be hifher than the eventual IHT vakye at death. Allthough getting a high ball valuation on transfer and low ball on death might not be that easy.

There is a range of values that you can put on any property and as long as it is within a range the HMRC valuer will except you can mitigate some taxes, it will depend on the type of property and locations and how much comparible data there is about on how low you can go for IHT before the valuer decides you are trying it on and then you risk delays.

As other have said I think some decent succession and tax planning advice is needed here, the plans so far don't seem to have been thought through fully.


* As the house is at around the nill rate band this will not even benifit from any taper relief if it was a proper gift and the OP father lives for close to 7 years. If the estate is big enough it might still be worth looking at disposals and trying to live for 7 years but the house is not the best asset to offload if the plan is for the father to live in it(alone).

00ec25

getmore4less wrote: »

The property is outside probate but not IHT, they are different.

agreed, however the probate valuation will include the house so in that sense it is still within probate, although I accept my statement was not technically definitive so has now been changed.

as for taper relief, that starts after 3 years I made no reference to that as (sadly) 3 years might (bluntly) be too long in this case...

xylophone

It seems to me that you and your father should see a solicitor as soon as possible so that you can obtain clear and accurate advice appropriate to your circumstances.

Your preliminary research will enable you to go armed with a list of questions - when these are answered to your satisfaction you will know how to proceed.

shraga

This is not very good at all. I keep making silly mistakes!

"1. siblings means brothers and sisters... is he giving the house to his brothers and sisters or is he giving the house to his children?" The house is being given to his three children, one of which is me

"2. what approximately is his total estate worth" The hosue is c. £650K and there may be around £25k-£40k in a mix of cash and shares/bonds

"3. you fully realise that unless he lives for 7 years after the gift, the full value of the house will be included in the estate for IHT purposes so there is no tax savings by making the gift." Yes - that is fully understood but we have been advised by multiple lawyers that if we plan to sell the house ASAP (that is my father's wish and our wish) then transferring the house prior to his passing will speed up the process and make probate simpler and cheaper - we understand that probate fees are a % of the estates' value.

"4. you fully realise that if you wait until his death then there will be no cgt (only IHT) so by making the gift you may well pay more tax overall.
Having said that, in the current market there may be no rise in the price anyway so no cgt." Yes that is understood but sadly due to the prognosis we are probably talking about a few months at most and the property market is hardly booming right now.

Regarding other questions posted above, there will be no issues with my sibnlings and I agreeing the sale price and also I trust my wife completely in regards to having her receive half of my share of the house in order to exploit her CGT allowance.

Savvy_Sue

John_Pierpoint wrote: »

Hi Sue,

Your postings are normally spot on but I think this one needs a little more analysis.

Oh, I agree, but I still maintain that if there are fewer executors than beneficiaries that it could well be less hassle to leave the house within the estate!

getmore4less wrote: »

As other have said I think some decent succession and tax planning advice is needed here, the plans so far don't seem to have been thought through fully.

I think we'd all agree on that ... even the OP! shraga, I think you should be getting a list of questions from this thread, and then taking proper advice with your dad (actually you'll probably have to take separate advice, because what's in your interests may not be in his best interests).

shraga wrote: »

Regarding other questions posted above, there will be no issues with my sibnlings and I agreeing the sale price and also I trust my wife completely in regards to having her receive half of my share of the house in order to exploit her CGT allowance.

I'm sure you do, but it is always wise to point out the potential issues! And I know when we come to sell my mother's house, I'll be a lot happier that it's just me and one sibling making the decisions, rather than all five of us.

jimmo

John_Pierpoint wrote: »

Jimmo, where are you when we need you?

Thanks.
There lots of things I don’t understand concerning IHT here but if the house is to be gifted by the father before death then it would seem to be more sensible, purely from a capital gains point of view, for him to gift one third shares to any of his children who are single and one sixth shares to each of the married children and their spouses.

I totally agree with CTA here and, yes John, you are referring to the Ramsay case but note that the spelling is 2 As not A and E.

Correct spelling is vital if you use the HMRC search facility.

From memory, one poster, ceeforcat, has had 2 cases where HMRC challenged what appear to be simple cases of gifts to the spouse prior to sale which he lost, whereas, as I have said before, the HMRC Capital Gains team that I was part of used to advise taxpayers to make such gifts as long as they had time to do so.

We used to advise that the gift should be properly recorded before the house was put on the market and, most definitely, before contracts are exchanged because you cannot gift something you no longer own.

The Ramsay case was about a series of (artificial) transactions with no commercial purpose with the sole intention of saving tax.

That needs to be contrasted with the Duke of Westminster case (19 TC 490) where Lord Tomlin said “…[FONT=ACBIEC+TimesNewRoman][FONT=ACBIEC+TimesNewRoman]“every man is entitled to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be”. [/FONT][/FONT]

So 2 classic cases with, pretty much, opposite results.

Again I agree with CTA. Serious professional advice is needed here but, at this stage, I would suggest that father gifting one sixth shares to spouses would be less clumsy than a gift by the father being quickly followed by gifts by the children to their respective spouses.

John_Pierpoint

Any thoughts on waiting until after the death and making an Instrument of Variation during the next two years to give shares of the property to the spouses left out of the will? There is even scope for changing who pays what in terms of taxes, within such a document (ie a choice for making or not making the new owner liable for IHT & CGT taxes arising from the asset. I think it has to be like that because of the two year deadline and because Income Tax, Capital Gains Tax and Inheritance Tax don't dovetail together as well as they might.)