Any advice on how to pay minimum tax when selling second home...

custardcrumble · 30 April 2007 at 3:50PM

Hi all,

This is my first post so please be gentle...

My future mother-in -law has a house that she bought with the proceeds of a house inherited from her mother. She bought it in excess of 10 years ago and has always rented it out, never lived there.

As I am soon to marry her daughter she would like to give us the house so we can sell it and buy our own (the house is approx 150 miles from where we live) but she does not want to have to pay tax...

I know that some tax payment is unavoidable but can anyone summarise all pertinent exemptions I might be due (taper relief for example) so I can work out some figures?

Finally, we would like to keep paying her the equivalent of the rent she gets each month for the forseeable future as this is her main source of income. Does this affect our/her tax liability?

Thanks for any and all help!

CC

Toni_Tax · 1 May 2007 at 1:13PM

If she gifts you the house she will have to pay capital gains tax as if she had sold it for market value... but then if she sells it and gives you the cash she will have to pay the tax anyway so yes it is unavoidable.

Capital Gains Tax would be payable as follows:

Proceeds £X
less cost and indexation £X (indexation is likely to be minimal)
less cost of improvement expenditure £X (only big stuff like double glazing or new bathrooms)

=Gain £X
less Taper Relief of 40% = taxable chargeable gain

Tax on the chargeable gain could be at 10%, 20% or 40% depending on the M-I-L's other income.

Maybe best to get an accountant to do you a professional estimate?

M-I-L will have to pay tax on the rent you give her as (I assume) she does for the property she rents out now.

Hope that helps,

Toni

custardcrumble · 1 May 2007 at 1:56PM

Thanks Toni, that certainly helps to start with...

Am I right in thinking I also have an amount tax free to start with (£8 or £9k this year?)? If so, and the house is gifted to both my fiance and myself, do we take off £8/9k each or just once?

Finally, if she gifts it now and survives 7 years then do we avoid having to pay tax as it is deemed to be inherited or something??

Thanks in advance!

CC

Toni_Tax · 1 May 2007 at 4:05PM

Yes, sorry in the above calculation take an estimated capital gains exemption limit off the 'taxable chargeable gain' at the end. It is your mother in law that gets this relief, not you and the fiance.

If the mother-in-law gifts the property to you and dies within 7 years then the property will still be included in the inheritance tax computation (although each year it is tapered and a lesser percentage is included). However, this is different to Pre-owned Asset Tax where if you give something away and then continue to receive a benefit from it you are taxed if you dont pay the market rent.

Toni_Tax · 1 May 2007 at 4:06PM

Doh!! The figure to take off the above calculation (the estimated capital gains exemption for 2007/08) is £9,100!!

custardcrumble · 1 May 2007 at 4:44PM

:T
Toni, you're a dream! Thanks for the info - I'm sure this means Uncle Gordon will be getting less from us

Cheers!
:beer:

silvercar · 1 May 2007 at 6:38PM

I would have thought you could give your M-I-L a gift each year rather pay money in lieu of rent. A gift, of upto I think £3,000 each, would be free of tax.