Help to understand Capital Gains Tax Please!

Missingursula2

Hi,

I am knew to understanding CGT, and this has been brought to my attention my a colleague.

I am trying to help my mother, who is now 66, to release some capital (to pay some outstanding bills relating to the recent death of my father)from her house, as the market to sell is flat. This would also cover a small mortgage she currently has, also.

Because of her age, it has proved difficult to get a mortgage in her name. The mortgage advisor (independent) has suggested that I take on a mortgage on a buy to let basis, with my mother 'gifting' the equity in the house to me. The mortgage would be 100,000 and the value of the house is approx 245,000.

My brother is due to have an insurance policy expire in the next 2 years and intends to pay off this mortgage. The title of the property would then revert to my mother, who intends to leave it to all of her grandchildren in her will. My mother will not pay any rent on the property and my sister and I will pay the mortgage, as she cannot afford to. I have never lived in the property and never will.

I would really appreciate any advice you could provide on the potential tax implications with this plan.

Thank you.

xylophone

The plan is for your mother to sell you her house at undervalue for £100,000? She will then pay off her mortgage, her debts and have some capital left over?

You will obtain the £100,000 through a buy to let mortgage. Your mother will pay no rent. You and your sister will pay the mortgage although your sister will not appear on the mortgage agreement?

Would any mortgagee agree to this arrangement?

In two years time your brother will give you the money to pay off the mortgage/ buy the house from you for £100,000?

He will then give the house to your mother?

Your mother will then leave the house to your and your siblings' children in her will?

Potential problems and pitfalls all the way?

http://www.hmrc.gov.uk/cgt/intro/gifts-inherit-divorce.htm

And what if your mother had to go into care?

uknick

Your brother is willing to give your mother £100k in 2 years? That seems very generous.

Instead of messing around with buy to let mortgages why not just buy £100k worth of your mother house. At current values that will give you a 40% share of the property.

If you then register you and your mother as tenants in common you remove your part of the property from any possible IHT calculation later, and maybe (and this is a big maybe depending on your mother's current health) you could avoid the home having to be sold and all the proceeds going to pay for care home fees. Google "tenants in common and care home fees" for more information on this.

There will be no CGT implication for your mother as it is her primary residence. Nor, will there be any IHT implication as long as it is bought from her at market value.

You brother could then buy out your portion when his insurance policy matures. There will be a CGT issue for you here as you have not lived in the property. But, you get about £11k as an annual CGT allowance. So the house would have to increase by about £28k in the 2 years for your gain to be above that allowance. (Your 40% of the gain must exceed £11k, so the total gain would need to be £11k/40%)

If he wishes he could then gift, without reservation, the house back to your mother. But, if they are his children the house will be left to in your mother's will, he may just as well leave it in his name and write his will so that his portion is specifically left to his children.

But, if I were you I'd find another financial advisor, who will give you impartial advice on all your possible options. I would be wary of any advisor who suggests you get a buy to let when they know you have no intention of getting any rental income.

getmore4less

Missingursula2 wrote: »

Hi,

I am knew to understanding CGT, and this has been brought to my attention my a colleague.

I am trying to help my mother, who is now 66, to release some capital (to pay some outstanding bills relating to the recent death of my father)from her house, as the market to sell is flat. This would also cover a small mortgage she currently has, also.

Because of her age, it has proved difficult to get a mortgage in her name. The mortgage advisor (independent) has suggested that I take on a mortgage on a buy to let basis, with my mother 'gifting' the equity in the house to me. The mortgage would be 100,000 and the value of the house is approx 245,000.

My brother is due to have an insurance policy expire in the next 2 years and intends to pay off this mortgage. The title of the property would then revert to my mother, who intends to leave it to all of her grandchildren in her will. My mother will not pay any rent on the property and my sister and I will pay the mortgage, as she cannot afford to. I have never lived in the property and never will.

I would really appreciate any advice you could provide on the potential tax implications with this plan.

Thank you.

£100k is a lot of debt

Are you sure these debts are the responsibility of your mum?
(OK the mortgage will be, what about the rest?)

Depending on the numbers the best option might be to just give mum the money for two years, there will be significant costs setting up this arrangement for just 2 years.

zygurat789

uknick wrote: »

Your brother is willing to give your mother £100k in 2 years? That seems very generous.

Instead of messing around with buy to let mortgages why not just buy £100k worth of your mother house. At current values that will give you a 40% share of the property.

If you then register you and your mother as tenants in common you remove your part of the property from any possible IHT calculation later, and maybe (and this is a big maybe depending on your mother's current health) you could avoid the home having to be sold and all the proceeds going to pay for care home fees. Google "tenants in common and care home fees" for more information on this.

There will be no CGT implication for your mother as it is her primary residence. Nor, will there be any IHT implication as long as it is bought from her at market value.

You brother could then buy out your portion when his insurance policy matures. There will be a CGT issue for you here as you have not lived in the property. But, you get about £11k as an annual CGT allowance. So the house would have to increase by about £28k in the 2 years for your gain to be above that allowance. (Your 40% of the gain must exceed £11k, so the total gain would need to be £11k/40%)

If he wishes he could then gift, without reservation, the house back to your mother. But, if they are his children the house will be left to in your mother's will, he may just as well leave it in his name and write his will so that his portion is specifically left to his children.

But, if I were you I'd find another financial advisor, who will give you impartial advice on all your possible options. I would be wary of any advisor who suggests you get a buy to let when they know you have no intention of getting any rental income.

Why not just give Mum the money she needs and register a charge on the property which will net down for IHT and not give rise to any CGT liabilities?

Missingursula2

Thank you for all of your replies.

My brother, sister and I are trying to find a way around all of the issues. My mum's income is now not sufficient to get her own mortgage, and her age is also a factor. My brother cannot legally do anything right now, nor can my sister due to their own commitments. I am the only possibility, as my mortgage is very small and I have a partner, both of us have secure employment with decent salaries.

Mum needs to release equity in the house, and despite having tried to tell her that an equity release plan would work, she wont do it as she doesn't trust it. I cannot change her mind. The money is required to settle my father's estate and give her a bit to have some holidays and good times after his long illness. The house is valued approx 240,000. Mum and Dad were joint tenants, not tenants in common, and there is no other surplus, so to settle his bills, the only option is to release the equity. if I had the money I would give it to her as soon as blink!

With regard to care home fees, this is certainly not an issue right now as she is fit and healthy. Of course, no-one knows what the future holds, but again my siblings and I have agreed that mum would live with one of us rather than going into a care home. My sister and I are both in caring professions and are aware of this commitment.

"Why not just give Mum the money she needs and register a charge on the property which will net down for IHT and not give rise to any CGT liabilities?"

I would only be able to raise the money against my mother's house. I'm not sure I understand that terminology- maybe that's what you mean!

Would a lender allow me to buy a share as was being explained, as per the example equating to 40%? If this was the case, I would be happy to do this and register as tenants in common (although slightly different terminology as we are in Scotland). And I would then arrange to leave it in my will to the children equally. My brother would not need to come into the equation then, really as, mum may downsize in a few years. At this point we would settle the mortgage and she is left with enough equity to buy a smaller house mortgage free.

Thank you for the advice re CGT as well.

The IFA is a colleague of my brother and seemed to be trying to find a solution.

I know I seem really stupid - this is not my usual field - i am very grateful for your opinions here. I wish I could wave a wand and take away this difficulty which is adding to our pain just now.

Missingursula2

PS do you want me to take this over to the mortgage board, rather than on this one?

holly_hobby

What debts of DADS are outstanding ?

Why is mum looking for capital to repay his os debts - as single named debts are not transferrable on death ?

There are various issues inc tax to be discussed, but lets first go back to basics as why Mum feels its necessary to release equity from her own assets to repay his debts ?

Come back with a bit more meat on the bones if you can.

Hope to help .. with my sincere sympathies to you, Mum and all for the loss of your Dad .... hope things are getting easier each day xx

Holly xx

Missingursula2

Holly, thanks for your kind words.

Ok, mum basically has no money, other than her pension. Because they were joint tenants, our understanding is that the outstanding CC debt (circa 10K!!) must be paid within 3 months, or they can force a sale of the house, as half of it is his estate. There is also an overdraft and funeral costs, mum's cc (4k) and the roof needs repaired. Current mortgage is 46,000, so total with a bit of cash for mum is 100k. It is a substantial home, and their plan together before dad became ill was to renovate and downsize. They got the renovation completed a month before his diagnosis (and also the financial crash) and so moving was not an option then as neither of them were able or up to it.

Does that make it clearer - its so easy to leave something key out when you know it inside out. Thank you

John_Pierpoint

Presumably "CC" means Credit Card not County Court?.

No mortgage protection life insurance policy presumably?

So mum is getting full state pension plus £???? of her own (works?) pension and half of dad's pension (what sort of pension).?

How young is mum? Ah 66. That is young she could easily be a widow for 20 years.
Does she have any skills that would enable her to earn more income [B&B in the renovated house for example]

How does she think she is now entitled to live ? [Would she, not could she, reduce her expenditure to match her income?]

Any prospect of mum getting capital from elsewhere - eg death of her rich single brother.?

As the undeclared intention was to sell a profit, how big is the accommodation, where mum is now rattling about? They have not done a very good job on the roof?.

"Down sizing" may not be the answer and probably would not be wanted; however the longer it is left the more difficult it becomes.

Is dad's will still capable of being amended (ie he has died within the last 24 months)?.Mind you if the house really is Joint not Common ownership, it does not look like there is anything much for the will to leave to anyone. Ah we are in Scotland so slightly different law on inheritance, housing, benefits and debts and outside my skill set.

Presumably tax wise only CGT is a possible risk, you still have £325/650k of zero rate for Inheritance Tax (IHT)?.

Personally I think lending £100k to the present situation might be like lending money to Greece - will it do more that kick the can down the road for 5 years?

Missingursula2

Thanks for your response John.

Ok yes, CC is credit card. And no, for the first time in their lives as mortgagees, they did not have life insurance - they remortgaged and with dad's illness they meant to do it but never got round to it. (i know, I know).

Mum has full state pension and a private pension she had (peanuts in the grand scheme!) and half of two of Dad's private pensions. It totals 950 each month and her outgoings are just over 250 (without current mortgage of 358, which i have paid last 2 months).

Yes, we did talk about b&b, and she is considering this for next summer. She does have other skills, but has masses of voluntary work commitments, so I am currently negotiating that she cut some of this down in order to do paid work and to live! She's worried this would be cheeky having recently been nominated for an OBE for services to charity though.

She is in a 4 bed semi, built circa 1950s- my dad was in the construction trade and trust me, it is the most well constructed and maintained house in the country! lol. However, the problem with the roof has developed from next door, which has not been maintained well; this is minimal though, and will be sorted for less than £2000. It hasn't been done yet as dad had been trying to negotiate with neighbour....that's now my brother's domain!

I understand about the downsizing, and it will definitely happen within the next 5 years, but aside from it being a bit raw at the moment, it just will not sell -even though it is a beautiful home, the issue with the neighbour and the lack of movement in this area of houses over 200k are big difficulties. It's being valued on Tuesday by estate agent, so we will see what they think.

There is no other capital, other than the policy my brother (not her's) has maturing next year and which he intends to pay off the mortgage. But we need a plan now, and I can't think what else to do.

Mum has always looked after us, so we will look after her now; that is what the 3 of us have agreed. I just wish we knew about all of this before Dad died.

Thanks, D.