CGT on gifted first property?

holly_hobby

If you have no audit trail of works completed , you will be unable to demonstrate (on HMRC request), that they were actually actioned during your ownership nor what the associated costs totalled .....

zygurat789

StarsDie wrote: »

The problem is we never thought to retain invoices so calculating our expenses will be near impossible. The funds were also loaned from many sources making it very difficult to trace. Is it likely costs will be estimated? Or anything we cannot prove we get taxed for?

The most important stuff in life is the paperwork.
You could always request duplicate invoices for the work done, presumably the builders etc will have kept proper records and will be able to supply them.
Why did you mention funds loaned, did you pay interest?

StarsDie

Thank you all for your advice.

Just an update. I spoke to HMRC and yes, in this situation almost certainly CGT will apply.

Due to the fact I cannot entirely prove my expenses the profit on the property that is taxable is going to be very high. We've been doing the property for over 7 years and suppliers usually only keep records for 3 years. Plus a lot of payments were made in cash coming from items I have sold and even a cash loan from a relative, therefore so much is untraceable and questionable.

I have thought of ways around it and I'm hoping for advice before going to a solicitor.

Scenario #1 - I purcahse my brothers share for an agreed sum of £1 (no CGT on that one!), live in the property for x amount of months and sell the property under Private Residence Relief and gift my brother his share.

Scenario #2 - I have both parents assigned to the property to increase tax relief. With all 4 of us we could have £43,600 untouched by CGT which may exceed our profit and count as a loss resulting in no CGT to pay. Some time after the sale both my parents gift their share of the profit to both me and my brother.

Are any of these technically legal? Other suggestions are welcome.

holly_hobby

StarsDie wrote: »

Scenario #1 - I purcahse my brothers share for an agreed sum of £1 (no CGT on that one!), live in the property for x amount of months and sell the property under Private Residence Relief and gift my brother his share.

PRR won't apply for your full ownership, as you didn't move into it within 12 mths (claiming refrub delay).

It will apply for your actual residency period though, and you can also offset your own £10,900 cgt allowance. However you're looking a yrs rather than mths to make any real impact on this, and would have to hope that the property doesn't continue to increase in value, or your just running to stand still.

StarsDie wrote: »

Scenario #2 - I have both parents assigned to the property to increase tax relief. With all 4 of us we could have £43,600 untouched by CGT which may exceed our profit and count as a loss resulting in no CGT to pay. Some time after the sale both my parents gift their share of the profit to both me and my brother.

Are any of these technically legal? Other suggestions are welcome.

Yes, thats a better idea, if there is no consideration given in exchange for the transfer of equity (TOE) to Mum and Dad, there is no SDLT to pay (but there will be CGT exposure on the TOE to them).

TOE conveyencer costs will be circa £400 - £500 depending where you are in the UK - if you effect as joint tenants, upon death occuring before you manage to sell, the deceased share will automatically be tsfd to the remaining owners, if you don't wish this, effect under a Tenants In Common arrangement - where you can each individually bequeath your share via your will (or it will follow intestacy regs if there is not valid will in place at death).

On disposal (sale), you divide the net gain by the 4 beneficial owners, and then you may each apply your own unsued CGT nil rate annual exemption (£10,900 2013/14) against the gain - if the parties don't currently use SA, and CGT is within annual exemptions, or there is no gain - there is no need to report to HMRC via SA.

Parents "returning" their share of any profit to you & bro, would expose the monies to PET regs (even if physically its already been divided between you and Bro) which will be relevant if the die within 7 yrs of the gift, and their net estate on death exceeds 325k per individual or upto 650k if there is unused Spousal relief available for transfer on 2nd death.

So, it could be a PET - however this would be further mitigated by utilising the 3k annual IHT exempt gift allowance (1st yr they can carry fwd last yrs unsued allowance - so in the first yr of gifting they could each give 6k (12k jointly), and thereafter 3k per individual per yr (until the amount you want officially transferred has been exhausted), which would still remain IHT exempt.

How much digging HMRC would do, and if they would deem this a tax avoidance scheme, or just prudent estate management, will depend upon how much daylight you leave between the TOEs and disposal.

You also need to remember that if parents also become legal owners, then the property will then also form part of their estate, which may again have IHT issues if held under TIC and on death before disposal, but should also be considered as regards any creditors and possible applications for charging or bankruptcy orders. (which I;m sure is not an issue, but worth mentioning for thoroughness).

Hope this helps

Holly

StarsDie

I had considered the inheritance tax on the gift and it probably would exceed 320k on their estate should they both pass away within 7 years, but not if it was one of them.

I have just spoke to someone and they suggested another scenario.

Scenario #3 - I move in, my brother stays at my parents but we put both names on all utility bills.

We should both qualify for Private Resident Relief on this one, but my question is, do we need to live there for a certain period of time before making a sale in order to avoid CGT?

holly_hobby

IHT nil band threshold is currently 325k per individual, not 320k.

Your brother would need to live there as his primary residence to qualify for PRR relief - as perviously stated there is no minimum time, if HMRC think you are swinging the CGT lead and your/his rsidency is only a CGT tax avoidance exercise - they will discount PRR and impose CGT regs on the whole gain regardless of whether all the bills are in your name(s) or duration or occupancy ... although of course the longer the residency the more weight to your claim of it being your permament abode.

I don't mean to be in any way rude, but you had 7 yrs to think this through, and now you're trying to do eveything last minute in a panic station mode - the answer is there isn't a quick fix to the situation you find your self in, other than proceed with your sale now as it stands, and incur the CGT that is rightly due.

Hope this helps

Holly

00ec25

StarsDie wrote: »

Scenario #1 - I purcahse my brothers share for an agreed sum of £1 (no CGT on that one!), incorrect live in the property for x amount of months and sell the property under Private Residence Relief and gift my brother his share.

Scenario #2 - I have both parents assigned to the property to increase tax relief. you are gifting a part share to your parents With all 4 of us we could have £43,600 untouched by CGT which may exceed our profit and count as a loss resulting in no CGT to pay. Some time after the sale both my parents gift their share of the profit to both me and my brother.

Are any of these technically legal? Other suggestions are welcome.

you are all "connected persons" so as soon as you change the ownership portions the person giving away their share will trigger a CGT disposal on their share

so that person would incur CGT based on the open market vale of the share at the time they transfer it to their relative

holly_hobby

00ec25 wrote: »

you are all "connected persons" so as soon as you change the ownership portions the person giving away their share will trigger a CGT disposal on their share

so that person would incur CGT based on the open market vale of the share at the time they transfer it to their relative

Spot on ... with you of course each able to apply your unused CGT nil rate exemption to the gain (£10,900 each 2013/14), plus additional qualifying reliefs/allowances to the TOE applicable on the 50% tsf.

If you then leave the dust to settle and don't sell until at least post 6 April 2014 (ie new financial yr & new CGT allowance), you & bro (plus parents) will then have your full new exemption relief for 2014/15 (which is £11,000 pp), that may then be applied to your indvidual share of gain on proceeds.

Which at that time will of course be 25% of the then proceeds to you and bro, instead of the current 50% exposure you both presently have as sole beneficial (& legal) owners (plus any PRR exemption), albeit it goes without saying that you may have both already suffered a CGT liability on the initial 50% TOEs to parents.

Whether effecting the TOE to Mum and Dad will actually be beneficial, will of course come down to if the property sells for a higher sum than the MV applied when the TOE to parents was initially effected.

It is what it is I'm afraid and there are no miracles in removing any CGT exposure ... its unfortunate that without retaining proof of improvement costs and outlay, your CGT exposure will be no doubt be more than what otherwise would have been necessary .... but you have to make the best of the situ you're in, and therefore accept that CGT to some degree will be payable.

Hope this helps

Holly

StarsDie

holly_hobby wrote: »

I don't mean to be in any way rude, but you had 7 yrs to think this through, and now you're trying to do eveything last minute in a panic station mode - the answer is there isn't a quick fix to the situation you find your self in, other than proceed with your sale now as it stands, and incur the CGT that is rightly due.

When we were given the property me and my brother were both just turning 20 and had no idea of CGT, nor did my parents think there would be any to pay because it's our first and only property, but of course they had it wrong. Me and my brother have worked on the place for 7 years now and mostly paid cash to friends who work in all the necessary trades. If we had of known at the time we would have done everything above board but we're just two guys trying our hardest to get a good deposit on our first home.

We are approaching the end now and it should be ready by May some time. We have both decided to move in and live comfortable paying the loan for another year to lower the debt and increase our profit and ultimately eliminate paying CGT. To me this seems like the most sensible solution.

getmore4less

StarsDie wrote: »

When we were given the property me and my brother were both just turning 20 and had no idea of CGT, nor did my parents think there would be any to pay because it's our first and only property, but of course they had it wrong. Me and my brother have worked on the place for 7 years now and mostly paid cash to friends who work in all the necessary trades. If we had of known at the time we would have done everything above board but we're just two guys trying our hardest to get a good deposit on our first home.

We are approaching the end now and it should be ready by May some time. We have both decided to move in and live comfortable paying the loan for another year to lower the debt and increase our profit and ultimately eliminate paying CGT. To me this seems like the most sensible solution.

The prolem is(unless you were very carefull on the phone) you have allerted HMRC.


The reality is that many taxes are voluntory and in a lot of cases CGT is one of them, allthough not that good if you get caught.


Moving in for a year won't eliminate the CGT assessment so there could still be a liability. It would give 3 years out of

There is a chance when you come to sell know one will notice but a year is not that long to cover the I did not know better trail.


The other problem you have with all these cash payments to mates, I bet they won't be keen on a income tax investigation if you try to get them included in the expences