Capital Gains

MuttonJeff

Can anyone help with the following situation;

About 30 years ago my grandfather died and left his house to my mum. Mum sold the house and used the money to buy another house for my grandma to live in. There is no mortgage on this house.

Last year my grandma died and my mother intended to sell the house and split the money 3 ways (her, my sister and me). However rather than doing this we have agreed that I will buy the house to live in.

We have 2 options, either I buy it off her for 80,000 (value is approx120,000, but maybe as high as 150), or I buy it off her for 120,000 and after this is complete she gives me 40,000 back.

Will either of these options incur capital gains tax for my mum, given that the house was bought for an elderley relative to live in, and if so is there a way of reducing or preventing this?

Thanks.

Dave_the_Ginger_Cat

Three separate topics come out here for me:

1)CGT

Has your mother bought another house since then, and where has she lived?

Tax law seems to define the primary residence as exempt from CGT, and this will affect if she has any liability on the house, whatever value she gets when she sells it on

The Tax office are pretty helpful on this, and I would call them for advice

I think the only way to reduce it is if it was her primary residence for any of that time

2) Inheritance
Should your mother sell to you for less than the market price, or gifts the £40k to you and does not live for 7 years (IIRC) after the transfer, then the value may be included as part of the estate for Inheritance tax (IHT). You don't say either of your ages, but it is worth considering

3) Bankruptcy law
Again, this about a sale at ndervalue and may be extended to include a material gift (such as £40k) I've found some sensibe commentary

http://www.fridaysmove.com/transfers-undervalue-selling-your-property-discount-implications-bankruptcy/14247

dunstonh

Who owned the house previously? If your mother owned the house that your grandfather lived in then there would likely be capital gains tax. If your grandfather owned the house there would not be capital gains tax as he owned his primary residence.

bigadaj

dunstonh wrote: »

Who owned the house previously? If your mother owned the house that your grandfather lived in then there would likely be capital gains tax. If your grandfather owned the house there would not be capital gains tax as he owned his primary residence.

Is that correct? If the OP s mother owned the house that her mother lived in, then there isn't PPR relief, as the grandmother didn't own the property.

MuttonJeff

Thanks for the replies. Mother is young enough that inheritence tax isn't an issue (plus it anything did happen to her, then father would keep everything).
Mother has never lived in the house. It was bought for her mother from proceeds of the sale of her father's house (which she inherited). Mother has her own house, which she has owned for over 20 years. Mother has also owned this house (the one we are looking to buy) for over 20 years.

I am aware that you don't pay cgt on your primary residence, but I also remember seeing (can't remember where) something saying you may be exempt from cgt if you buy a second house for an elderley or infirm relative to live in.

dunstonh

Mother has never lived in the house. It was bought for her mother from proceeds of the sale of her father's house (which she inherited). Mother has her own house, which she has owned for over 20 years. Mother has also owned this house (the one we are looking to buy) for over 20 years.

Unfortunately, that is bad news. That means capital gains tax will apply. IN effect, the second property is classed as an investment property.

Also, inheritance tax could still apply as well as the gift of money to your mother to allow the house to be bought never qualified as a potentially exempt transfer as your grandmother continued to get benefit from it for the rest of her life. For it to qualify under the 7 year rule, she could not benefit from the proceeds.

MuttonJeff

Grandma didn't gift the money to buy the house, grandfather left it to mother after he died (grandma & grandfather were divorced and did not live together. Also the grandfather's estate would have been well below the inheritence tax threshold, unless in was much lower 30 years ago). I think this is too complicated a situation to explain online, so we'll need to seek some face to face advice.

One last question (forgetting all the above), if I buy a house for my elderley mother to live in (bought outright, no mortgage), and she lives there for 25 years, will I pay capital gains when she dies and I sell the house (i have never lived there and there is no estate to speak of)?

dunstonh

Grandma didn't gift the money to buy the house, grandfather left it to mother after he died (grandma & grandfather were divorced and did not live together. Also the grandfather's estate would have been well below the inheritence tax threshold, unless in was much lower 30 years ago). I think this is too complicated a situation to explain online, so we'll need to seek some face to face advice.

That would avoid the IHT issue. It wont avoid the CGT issue though.

One last question (forgetting all the above), if I buy a house for my elderley mother to live in (bought outright, no mortgage), and she lives there for 25 years, will I pay capital gains when she dies and I sell the house (i have never lived there and there is no estate to speak of)?

yes

MuttonJeff

What does this mean then? (lifted from hmrc website)

Owning a property used by a relative
If you buy a house for a relative to live in and don't live in it yourself, you won't usually get Private Residence Relief when you sell or dispose of it.
But, if you bought the property before 5 April 1988, you may get Private Residence Relief if it was purchased for:
an infirm relative unable to live independently
a mother or mother-in-law who is no longer living with her husband

holly_hobby

This is what you are referring to ....

Residence provided for a dependent relative


In addition to the relief that may be due on disposal of your own residence, you may also be entitled to relief when you dispose of a residence which you have provided for a dependent relative. But you cannot get relief for:

• any residence acquired after 5 April 1988, or

• any residence acquired before that date unless the conditions for relief were met by that date.


The qualifying conditions for this relief are:

• the dependent relative must occupy the dwelling house rent free and
without any other consideration (ie anyother payment or exchange of goods in payment for their occupancy)

• only one dependant’s dwelling house can qualify at any one time

• a husband and wife or civil partners who are living together can claim relief for only one such dwelling house between them

• the dwelling house must be the sole residence of the dependent relative.


HMRC class dependent relatives as:

• any relative of yours or your spouse or civil partner who is incapacitated by old age or infirmity from maintaining himself or herself, or

• your own or your spouse’s or civil partner’s mother who, whether or not incapacitated, is either widowed, or living apart from her husband, or is a single woman in consequence of dissolution or annulment of marriage.

So, as Gran was (at the time of pch) effectively a single woman as a result of dissolution of marriage (divorce) - your Mum may certainly appear to qualify for full PRR exemption, IF the pch was pre 5 April 1988 and at the time of pch Gran qualified under the above requirements.

IHT

If sold at undervalue, the diff between market value and pch price, will be exposed as a PET for 7 yrs from the event. (assuming Mum does not reside or retain any benefit from the property).

Cashback on Completion

You are not permitted to apply for a mge where the vendor will return to you a portion of the mge funds as a cashback. This is fraudulent - and both you and Mum will be in deep doo doo if you engage in this activity.

However there is another way to avoid the requirment of a monetary deposit ....

If you are buying from Mum for 80k but the market value is 120k, and Mum doesn't want the difference - you are effectively purchasing under what is termed as a Family Discounted Purchse - which effectively means that you may not need a monetary deposit.

In this case, your mge application shows the pch price (market value) as 120k, but a mge reqd of just 80k (ie what you have agreed), the difference effectively acting as your deposit (if of course the property values up at this on lenders valuation, if not the effective deposit will obv be effectively reduced and the LTV higher). NB - This arrangement is only permitted when is is a direct family related pch - and under no other circs.

Your adviser will assist and advise further.

Hope this helps

Holly
-

Thrugelmir

holly_hobby wrote: »

If you are buying from Mum for 80k but the market value is 120k, and Mum doesn't want the difference - you are effectively purchasing under what is termed as a Family Discounted Purchse - which effectively means that you may not need a monetary deposit.

Holly. Does this create another issue. As will CGT be based on market value not sales price. As the tranaction is with a connected party not at arms length.