Capital Gains Tax

Whippy1980

Bear with me on this one!

38/40 years ago my nanna and grandad bought a house but needed my mother to put her name to the mortgage as well. They all lived in it for a few years but then my mam moved on.

My grandad died 1992 and my nanna died 2008 so it was handed to my mam but i moved in with my family after my mam got a 35k loan to help us extend it.

I am now in process of buying it but my mams solicitor is suggesting she may be liable to cgt but i dont see how.

We dont know how much it was worth when it was bought or when my grandad died but in 2008 it was worth £75000. It is now worth £85000 but has had £35000 worth of work done to it. My understanding that usually this would not incurr liability to cgt but the solicitor is saying it is different as she was part owner in the first place.

My mam is not making any money out of this transaction so im hoping there wont be a cgt liability but can anyone offer an opinion?advice?suggestion?

Savvy_Sue

This is not my area of expertise (few are), however to save you a bit of time later, to get actual sums, I think you'll need to say what month and year each 'event' happened. Also, after your mum moved out, were your grandparents paying rent to her? When you moved in, were you paying rent to your mum? And what is the status of the loan: are you repaying your mum, and will it be paid off by the mortgage? (that may be a red herring, but just in case not.)

If the house had always been your mum's main residence, then there wouldn't be a capital gain. It's the selling something which is worth more now than it was when she acquired it that causes the liability.

jimmo

On the face of it your mam is potentially liable to cgt but there’s an awful lot of detail to go into.

Firstly your story sounds to me rather like your nanna and granddad may have bought their council house under Right to Buy but, on their own, they wouldn’t have been able to get a mortgage in their own names. So your mam’s name had to be added into the deal but, in reality, she contributed no money to the purchase price and, apart perhaps from paying a bit of housekeeping whilst she lived there, she did not contribute towards the mortgage, council tax etc.

That is aimed at establishing whether your mam became a beneficial owner of the house when it was originally bought and beneficial ownership is far more important than legal ownership for cgt purposes.

http://www.hmrc.gov.uk/manuals/cgmanual/CG70230.htm

uknick

From what you've written I assume your mother has not lived in the property as her main residence for many years, and is not now living in it. In that case there will be a requirement for a capital gains calculation.

The simple calculation is, if the market value now is £85k and the deemed cost is say £75k, ignoring the loan spend, you still only end up with a gain of about £10k. You mother has about £10k of CGT allowance this tax year, therefore no tax to worry about.

The more complicated answer is; before she moved on originally did she actually own part of the property? If so, what happened to her share? Did her parents pay her back for the share?

I assume she then inherited it in 2008 as part of her mother's estate. If she had no stake in the property at all at that time it is deemed to pass to her at the value of £75k. I assume this is the value put on the IHT form.

You then need to add to that value the “allowable” spend from the £35k loan used to extend the property. I say allowable because certain spend such as decorating and maintenance are not allowed as CGT deductions when refurbishing properties.

For the improvements to count you ought to have kept receipts etc. to prove what you spent.

You should then end up with the “cost” of the asset. Take that away from the current market value and you get the gain. For the market value I would get at least 3 valuations from estate agents in the area to show to the HMRC if they come asking.

Whippy1980

The house was ex council yes.

My mum has not lived in the property for 37 years but as far as im aware her name was added to the mortgage but she has never paid anything or received any money from the property. As for dates and costs other than what i have said my mam is unaware of either from the date of purchase and when my grandad died.

As for the 35k loan it was an interest only remortgage of her own property but all the money was used by me for extensions, putting bathrooms and kitches in, electrical rewiring etc etc. Some on decor though yes. I have been repaying the interest but my mam is repaying the 35k from the money received from me buying the property.

N.B. my mam agreed when my nana died that the house would be slpit between me and my brother so i am buying at 60k (worth 85k) and my brother is getting the difference after the 35k is repaid.

Whippy1980

i should add that in terms of receipts for work getting done it was 5 years ago and none of this was even considered so no receipts!!

Whippy1980

my solicitor suggested hmrc wouldnt even be interested and laughed when we told him we were speaking to them about it. He suggested they wouldnt even look into it. Is this true??? Or would they find out and come looking??

Laurajo_2

I'd be a bit worried that your solicitor is advising you to defraud hmrc, to be honest...

Solicitors are notorious for giving terrible tax advice.

Hmrc can find out quite easily...and often do.

I'm assuming she owned a third of the house? Did they own as tenants in common or jointly? Potentially, she could have a base cost of 1/3 the original purchase price, 1/6 of the value upon grandfathers death and 1/2 of the value upon grandmothers death, plus the 35k extension costs.

The final three years will be exempt if the property has been her primary residence at any point, plus any time that the property was actually her primary residence.

Given that the property is currently worth 85k and has had 35k of extensions, it is quite possible that the gain is under the annual exemption, however will still be reportable as proceeds will be over four times the annual exemption.

Whippy1980

Laurajo wrote: »

I'd be a bit worried that your solicitor is advising you to defraud hmrc, to be honest...

Solicitors are notorious for giving terrible tax advice.

Hmrc can find out quite easily...and often do.

I'm assuming she owned a third of the house? Did they own as tenants in common or jointly? Potentially, she could have a base cost of 1/3 the original purchase price, 1/3 of the value upon grandfathers death and 1/3 of the value upon grandmothers death, plus the 35k extension costs.

The final three years will be exempt if the property has been her primary residence at any point, plus any time that the property was actually her primary residence.

Given that the property is currently worth 85k and has had 35k of extensions, it is quite possible that the gain is under the annual exemption, however will still be reportable as proceeds will be over four times the annual exemption.

Exactly why we spoke to hmrc already. I imagine if her name was on mortgage then she would have been 1/3 owner but she never saw it that way as it was literally just putting her name to it to ensure they were allowed the mortgage.

We have looked into values for when my grandad died etc but no where was able to help as they all said they stopped keeping such records

Savvy_Sue

Whippy1980 wrote: »

Exactly why we spoke to hmrc already. I imagine if her name was on mortgage then she would have been 1/3 owner but she never saw it that way as it was literally just putting her name to it to ensure they were allowed the mortgage.

It doesn't really matter how your mum saw it, it's how HMRC see it which counts. By the sound of it, there isn't likely to be a massive amount of tax to pay, if any, and they WILL find out because the change of ownership will be notified to them when the solicitor does the Stamp Duty calculation.

It sounds as if her solicitor is more on the ball than your own. I always feel that if you're paying a professional for a service, by all means check what they tell you but then follow their advice.

Whippy1980 wrote: »

We have looked into values for when my grandad died etc but no where was able to help as they all said they stopped keeping such records

I know on the Probate board people have used Nationwide valuations? Don't know how far back they go. Also there's a Land Registry rep who posts over there from time to time: I'd post there specifically about the issue of how to find historic values for a property.

Whippy1980

Laurajo wrote: »

I'd be a bit worried that your solicitor is advising you to defraud hmrc, to be honest...

Solicitors are notorious for giving terrible tax advice.

Hmrc can find out quite easily...and often do.

I'm assuming she owned a third of the house? Did they own as tenants in common or jointly? Potentially, she could have a base cost of 1/3 the original purchase price, 1/3 of the value upon grandfathers death and 1/3 of the value upon grandmothers death, plus the 35k extension costs.

The final three years will be exempt if the property has been her primary residence at any point, plus any time that the property was actually her primary residence.

Given that the property is currently worth 85k and has had 35k of extensions, it is quite possible that the gain is under the annual exemption, however will still be reportable as proceeds will be over four times the annual exemption.

My mam has no idea what it means to be tenants in common or joint she just knows her name was on the mortgage lol. What does this 1/3 look like in figures? ie is it 1/3 of 85k (current value), 75k (when nanna died)? To be honest im not quite sure what you are meaning, can you give me an example?