capital gains on rental

tanyard

25 years ago, we bought a rental property, with money left to me wife. house in joint names, I always thought rental profit could be classed as hers, as she never worked nor used tax allowance; now from reading MSE it look like 50/50 on profit; she would still be below her allowance but it could push me over mine; it was never declared to tax man as we thought no tax due; Does Disability allowance count as part of my income for tax purposes; Also, we have to change our wills, made years ago, leaving all to each other; we have 5 adult children and well leave equally to them; what is the best way to minimize CGT ( no IHT applicable). thanks, also what is the best way to will our residence; I know i will have to take legal advice on will making but would like to know as much info and help beforehand. many thanks for any suggestions or help; should add that we are both in our 60s

nomunnofun

Where does CGT come into it? Are you selling the property?

DLA is not taxable income.

tanyard

we are intending leaving it to our children and wanted to know if there is any way of trying to reduce capital gains; we bought the house for £20K and its now worth £300K which could leave Capital gains aroung 80.000 after allowances and expenses over the years.

John_Pierpoint

At the time of death you pay IHT instead of CGT [not as well as].

Each member of a couple gets a nil rate band for IHT of £325,000 and anything left to the surviving partner is tax free anyway.

Land (that happens to have a house on it) can be owned as joint tenants or tenants in common. The rental property is probably held as joint tenants, (Google for how to tell the difference) so regardless of what any will might say the survivor, of the joint tenants, inherits the other half. So at that stage the transfer, to the widow, would be free of IHT (and CGT.).

If the surviving (legal) partner inherits everything, when they subsequently die their estate would be entitled to 100% of two nil rate bands for IHT purposes.
[If some of the nil rate band has been used up at the time of the first death then that percentage of a nil rate band is not available at the time of the second death. For example if two children inherit £32,500 each from the estate and its nil rate band of £325,000 then only 80% of a nil rate band will be inherited by the survivor. The subsequent death of the Survivor would create an estate with 100% of its own nil rate band available but only 80% of a second inherited nil rate band; thus using current tax allowances the first 325,000 +325,000 - 75,000 = £575,000 of net worth would pass tax free to the beneficiaries of the second-to-die].

Obviously all this matters only if the current combined net worth of both of you is over £325k.

There is more to leaving wealth than the tax angle, important though that is.

The support of the survivor and their ability to manage wealth in their dotage is important.
It is possible to change a joint tenancy into a tenancy in common and then leave the surviving spouse a life interest in the half they inherit, if you are worried that they might leave the whole property inappropriately or that the local authority might grab it all for care home fees.

Who is writing your will?

If they don't understand and explain all this, get a better will writer.

tanyard

understand IHT; but was lookinf for advise re Rental property (joint names). this will be left to me children on 2nd death; is it possible to reduce CGT ( which would be around £80K)ie 20k purchase price; todays value 300K less allowances and expenses over the years. can you suggest any way I can help to bring the tax down i.e. changing deed poles to include them or what else, I would be turning in my grave at the thought of Government getting so much money.

holly_hobby

Ok, lets keep this simple.

CGT is payable on gains made on disposal (sale or transfer) of an asset - by the beneficial owner, and is the difference between the acquisition price and (net of permitted reliefs/deductions) selling proceeds - 18% basic tax payer, 28% higher rate taxpayer in respect of property.

IHT is payable by an individuals ESTATE, if their NET estate (including any non-exmpet transfers or PETs) exceed the nil rate IHT band - which is currently 325k pp.

Property/assets etc left on death to a SPOUSE/civil partner (but not between unmarried partners/couples), are exempt for IHT assessment - with the possibility to transfer (on application to HMRC by the executor/administrator) any unused nil rate band of a pre-deceased spouse, either wholly or as a % following the adjustment of non-exempt gifts/transfer, to the estate of the surviving spuose on their subsequent death - which means that their nil rate band for use by their executor, may be double or more subject to HMRC maximums (if there is more than 1 pre-deceased spouse in the background with any unused nil band IHT).

In this case we are talking about the best way to minimise CGT oayable to HMRC, which is to bequeath the property to your children via your will(s), presume bequest would be on 2nd death if the property is held under a standard Joint Tenants arrangement.

If your children subsequently sell the property, the CGT calculation will be based on the difference between market value at death (ie when they became the beneficial owners through its inheritance), and the subsequent sale proceeds - less unused CGT annual exemption (ie £10,900 per person 2013/14), plus applicable reliefs and allowances. Which hopefully will result in nil CGT on each individual share, unless there is a significant delay between inheritance and sale and the market explodes (and/or the value is greatly enhanced by any post ownership improvements they undertake - although the actual cost of the imps are a permitted CGT deduction, along with disposal costs).

Of course the (net) value of the property on death will form part of the decd's estate (2nd death if jnt tenancy), and we've already touched on how this can be managed by their executor.

Hope this helps

Holly

00ec25

tanyard wrote: »

understand IHT; but was lookinf for advise re Rental property (joint names). this will be left to me children on 2nd death; is it possible to reduce CGT ( which would be around £80K)ie 20k purchase price; todays value 300K less allowances and expenses over the years. can you suggest any way I can help to bring the tax down i.e. changing deed poles to include them or what else, I would be turning in my grave at the thought of Government getting so much money.

you do not seem to be understanding this,
the rental property is owned by you and your partner. When you die and your partner inherits your share, there is NO CGT LIABILTY at that time. There may be IHT depending on the value of your estate

when partner dies and his share is inherited by the children, there is NO CGT LIABILTY at that time. There may be IHT depending on the value of his estate and how much IHT nil rate bad is carred over from your death and added to his

when your children eventually sell the rental property after you are dead the children will be liable to CGT based on the difference between what it sells for and its value at the date they inherited it. There is nothing you can do now to change that. If you make them an owner now all you are doing is making them liable for income tax on their share of the current rental income and bringing forward the date of their ownership, so increasing their exposure to CGT in the future. In the meantime the estate may also be liable to IHT and therefore this is called the double tax whammy as the kids' inheritance in that case will be eroded by both IHT and CGT

forget about CGT, its irrelevant to your situation, you need to plan your IHT not worry about CGT

holly_hobby

00ec25 wrote: »

the rental property is owned by you and your partner. When you die and your partner inherits your share, there is NO CGT LIABILTY at that time. There may be IHT depending on the value of your estate

The property owners are married, with tsfs between them, or on death IHT exempt - regardless of the value of the net estate.

IHT only comes into play when non-exempt transfers are made os of the marriage to 3rd parties and/or on death.

If they tsfd property and all beneficial ownership now, the gift would be a PET ( so will fall os of their estate for IHT purposes, if death occured after expiration of the 7 yr PET clock), however as stated, the acquisition price for any later CGT calc will be based on the market value at transfer. There would also be SDLT if any consideration was exchanged, including the repayment of any os mge, inexcess of nil rate SDLT band (currently 125k).

Hope this helps

Holly

xylophone

When you die and your partner inherits your share, there is NO CGT LIABILTY at that time. There may be IHT depending on the value of your estate

It appears that the husband and wife own the rental property as joint tenants - if this is the case then the property automatically becomes the property of the other spouse on death. There is no question of IHT.

Even if the property were owned as tenants in common and one spouse willed his share to the other, there would be no IHT.

If the property were held as tenants in common and one spouse willed the share to anyone other than the spouse, there might be IHT to pay depending on the value of the deceased's estate.

tanyard

thanks to all; our estates will all come under nil IHT on both deaths; this will leave our residence plus rental, which will still come under IHT £650K both will be left to 5 children and hopefully increase of value of pproperties will not be more than 50/75K. this amount divided by 5 children, less their allowances, should be little or nil. hope i am working this out correctly. I like to know things before we see Solicitor. also can 2 of children be Executors

CLAPTON

tanyard wrote: »

thanks to all; our estates will all come under nil IHT on both deaths; this will leave our residence plus rental, which will still come under IHT £650K both will be left to 5 children and hopefully increase of value of pproperties will not be more than 50/75K. this amount divided by 5 children, less their allowances, should be little or nil. hope i am working this out correctly. I like to know things before we see Solicitor. also can 2 of children be Executors

If the first death leaves everything to the surviving spouse, then at the second death the IHT allowances is 650,000

so if your two properties and other things are worth less than 650,000 then your estate pays no IHT

cgt is irrelevant and has no bearing on the situation.
your children have no allowances that are relevant to the situation



if you intend selling the rental property before your death then cgt may be an issue