CGT and Inheritance Tax on property

Biggidy

Hi all,


My Father passed away at the beginning of 2013; he died intestate and we are currently applying for Letters of Administration. Me and my Sister will inherit a house.
At the time of his death, the house was valued at £630000.

The house is currently valued at £850000.

We are applying to have the thresholds of my Father(£325000) and my Mother (£325000). Who passed away when I was younger, put together so the maximum threshold for inheritance tax will be £650000.

Up until 2012, a year before my father’s death, I was living with my father in his house. I then moved out as I married to live with my wife. My wife owns her own house we both live in.

My Sister owns her own house.

Me and my Sister are both basic rate tax payers.


My question therefore is, if we sell my late Father’s house, can I claim I have been living in it to avoid Capital Gains Tax?
I have been advised by a solicitor I can do this because I do not own a property and was living in it near the time of his death.

Can the house also be sold in my name and the money goes into my bank account which I can then give to my Sister afterwards, as a gift?


I hope my situation is clear, thanks for any help.

Your_Hero

Biggidy wrote: »

Hi all,

My Father passed away at the beginning of 2013; he died intestate and we are currently applying for Letters of Administration. Me and my Sister will inherit a house.
At the time of his death, the house was valued at £630000.

The house is currently valued at £850000.

We are applying to have the thresholds of my Father(£325000) and my Mother (£325000). Who passed away when I was younger, put together so the maximum threshold for inheritance tax will be £650000.

Up until 2012, a year before my father’s death, I was living with my father in his house. I then moved out as I married to live with my wife. My wife owns her own house we both live in.

My Sister owns her own house.

Me and my Sister are both basic rate tax payers.

My question therefore is, if we sell my late Father’s house, can I claim I have been living in it to avoid Capital Gains Tax?
I have been advised by a solicitor I can do this because I do not own a property and was living in it near the time of his death.

Can the house also be sold in my name and the money goes into my bank account which I can then give to my Sister afterwards, as a gift?

I hope my situation is clear, thanks for any help.

No it is not your main residence so you cannot claim Private Residence relief. Furthermore please read this HMRC link:
http://www.hmrc.gov.uk/cgt/property/sell-own-home.htm

In particular:


"In his Autumn 2013 statement the Chancellor announced that from 6 April 2014 (tax year 2014 to 2015) this final period relief will only apply to the final 18 months of ownership. There will be an exception for people who are disabled or in long-term care. This measure is set to become law later in 2014."

The house is jointly owned by you and your sister, so how can you sell the house "in your name only"? I can't see any benefit to this either.

It's better to sell the house jointly and share the capital gain. That way you can both use your CGT allowances (£11k) to offset part of it. I'm afraid CGT will be due on the profit you have made. To my understanding this would be £850,000-£630,000 = £220k or £110,000 each less expenses.


If you've made a gross profit of £110,000 each, I think it's only right to pay some tax?

This gain will then be added to your income for the year, and 18% is due on basic rate tax, and for any gains that push you into higher rate then 28% is due.


There are investment vehicles that you could invest the gain in to become CGT-free after 3 years (e.g. EIS) or less but they involve 'high' risk and only suitable for the experienced investors.

Biggidy

Thanks for your prompt reply.

We have invested 13k putting in a new kitchen, painting and general works. I assume this will be deducted before CGT is applied?

Also when you say share the capital gain, this means the 18% will be divided by both of us, thus meaning 9% each day until we go over to the high rate?

Your_Hero

Biggidy wrote: »

Thanks for your prompt reply.

We have invested 13k putting in a new kitchen, painting and general works. I assume this will be deducted before CGT is applied?

Yes, deducted from the sale proceeds before calculating your profit and capital gains.

xylophone

We are applying to have the thresholds of my Father(£325000) and my Mother (£325000). Who passed away when I was younger, put together so the maximum threshold for inheritance tax will be £650000.

You mean that you will have £650,000 to set against any IHT due?

Did Father have no assets other than the house? For example, did he have cash in bank/building society accounts, shares, chattels?

You need to value the whole estate to calculate the IHT due.

xylophone

Also when you say share the capital gain, this means the 18% will be divided by both of us, thus meaning 9% each day until we go over to the high rate?

Each of you has a CGT allowance of £11000 to set against the share of the capital gain.

See here http://www.hmrc.gov.uk/cgt/intro/basics.htm
http://www.hmrc.gov.uk/rates/cgt.htm

Biggidy

My Fathers only asset was the house and £8k in savings, which at the time of his death was valued at £630k. This means if our application for joint thresholds of my Father and Mothers is successful we should come under the £650k allowing us not to pay any IHT?


Just to add a further question, my father did have a £60k re-mortgage against the house, will this increase the IHT threshold or decrease our profit and thus CGT?




Regarding CGT allowance, using the previous example of £220k.


£220k - (£11k + £11k) (personal allowances)


= £198k (this is what CGT will be payable on)


thanks again for all your replies

booksurr

Biggidy wrote: »

My Father passed away at the beginning of 2013; he died intestate and we are currently applying for Letters of Administration. Me and my Sister will inherit a house.
At the time of his death, the house was valued at £630000.

The house is currently valued at £850000.

We are applying to have the thresholds of my Father(£325000) and my Mother (£325000). Who passed away when I was younger, put together so the maximum threshold for inheritance tax will be £650000.

so probate has not yet been completed and until that is done HMRC have not yet "ascertained" (ie accepted) that the property was correctly valued at 630k at date of death so it is not yet possible to be sure how much your gross gain is for CGT purposes
http://www.hmrc.gov.uk/manuals/cgmanual/cg16251.htm

you need to deal with the IHT first before you even think about CGT. You need to get the total value of the whole estate sorted out as a priority so that the IHT bill is clear before you even think about CGT

EDIT - I see you have now posted that the value is £638k so would indeed be below the iHT threshoild but HMRC have not accepted that yet ....

Biggidy wrote: »

Up until 2012, a year before my father’s death, I was living with my father in his house. I then moved out as I married to live with my wife. My wife owns her own house we both live in.

My question therefore is, if we sell my late Father’s house, can I claim I have been living in it to avoid Capital Gains Tax?
I have been advised by a solicitor I can do this because I do not own a property and was living in it near the time of his death.

your solicitor is wrong for 2 reasons:
1) you did not live in it whilst you were an owner; and
2) (crucially) you got married before you inherited it therefore your main home must, under tax law, be the same as your wife's so cannot be the inherited house

Biggidy wrote: »

My Sister owns her own house.

your sister is indisputably liable for CGT

Biggidy wrote: »

Me and my Sister are both basic rate tax payers.

you misunderstand how CGT is calculated - the gain is added to your pay/ other income in that tax year and if the total figure is more than £41,865 then you will pay some CGT at 28% as well as some at 18%. It is not all at 18% just because you are a basic rate income tax payer

Biggidy wrote: »

Can the house also be sold in my name and the money goes into my bank account which I can then give to my Sister afterwards, as a gift?

absolutely not, that would be fraud. Under the intestacy rules you and sister (as the nearest surviving next of kin) inherit the property in equal shares so you cannot sell in your name.
You can sell as the personal representative of your father's estate rather than selling as an owner and thus avoid having to transfer the house into your and your sister's name, but half of the money is hers and hers alone. She cannot avoid her tax by you "gifting" her share of the house sale proceeds to her since it is legally her money to start with

given the value of the estate, the fact it is intestate and that your solicitor appears to know nothing about tax I suggest you get a new solicitor who understands inheritance tax and CGT or get an accountant to advise your solicitor before you make a mistake as the personal representative that HMRC will crucify you for

booksurr

Biggidy wrote: »

My Fathers only asset was the house and £8k in savings, which at the time of his death was valued at £630k. This means if our application for joint thresholds of my Father and Mothers is successful we should come under the £650k allowing us not to pay any IHT?

Just to add a further question, my father did have a £60k re-mortgage against the house, will this increase the IHT threshold or decrease our profit and thus CGT?

so he didn't
- own a car?
- the house had no contents?
- have any personal possessions?
- have a life insurance policy?

the value of the outstanding mortgage is a debt against the estate so will reduce the value of the estate by £60k since the estate will be required to pay off the mortgage as patently the mortgage cannot continue in your father's name

Biggidy

Hi thanks for the response, we have a good solicitor dealing with the IHT.

The one who advised me is not an expert on this matter but deals with conveyancing and said it was something he has seen people do.
Obviously I do not want HMRC knocking on my door in a few years and charging me with any fraud, so I have sought your advise.


My Sister is keen on tax avoidance as she trusts this solicitor but I am not so, so I am trying to get a better understanding of the position I am in and what responsibilities I have.


At the end of the day, I know I am fortunate to have this inheritance, but do not want to get greedy for a few thousand and end up in trouble.

Biggidy

Hi booksurr,

My Father was a free spirit and didnt really bother himself with financial stuff, hence why there was no will.


He had no car or life insurance. The contents of the house were minimal and anything of value were a few electrical goods I bought him for Xmas and his birthday.


Regarding the debt against the estate, will this benefit the IHT threshold or reduce the CGT as there would be less profit?