Potentially Exempt Transfer

Mrs_pbradley936

I inherited a house in 1999 we have never lived in it and it has always been rented out via an agent. The house is held under a Tenants in Common basis by my husband and I and we are considering transferring 60 or 70 per cent to our son. He wants to live there. Any pitfalls to doing this? We are in our 60s.


Or is there a better way to proceed if we want to limit IT.

booksurr

1. CGT
It has never been your main home therefore it is an investment property liable to Capital Gains Tax

Furthermore a transfer to your son would count as a "disposal" and trigger an immediate CGT liability which because it is your son - "a connected person". The tax due would be based on the gain between the probate value at date of death and its current market value at date of transfer. If that gain is more than £22,000 (ie the total personal allowances available to you and husband) then you would have to pay the CGT at either 18% and/or 28% - if you have the cash to do so without having to sell other things then fair enough, if you don't have the cash to pay the tax you have a problem!

2. Deprivation of assets
as it is a gift if you ever need to claim means tested benefits (eg care home funding) you would be held to have deliberately given away a chunk of your capital and therefore your means test would be assessed on the basis you still owned it so you would get a reduced claim

3. IHT / PET
yes it would count as a PET for 7 years after you gifted it to him, since you do not live there so there is no reservation of benefit but only provided you do not continue to receive the portion of rental income attributable to the 60-70% you have transferred to son.

4 IT
does your son want to become a landlord and be liable for income tax on his share of the rent ?

Mrs_pbradley936

booksurr wrote: »

1. CGT
It has never been your main home therefore it is an investment property liable to Capital Gains Tax

Furthermore a transfer to your son would count as a "disposal" and trigger an immediate CGT liability which because it is your son - "a connected person". The tax due would be based on the gain between the probate value at date of death and its current market value at date of transfer. If that gain is more than £22,000 (ie the total personal allowances available to you and husband) then you would have to pay the CGT at either 18% and/or 28% - if you have the cash to do so without having to sell other things then fair enough, if you don't have the cash to pay the tax you have a problem!

2. Deprivation of assets
as it is a gift if you ever need to claim means tested benefits (eg care home funding) you would be held to have deliberately given away a chunk of your capital and therefore your means test would be assessed on the basis you still owned it so you would get a reduced claim

3. IHT / PET
yes it would count as a PET for 7 years after you gifted it to him, since you do not live there so there is no reservation of benefit but only provided you do not continue to receive the portion of rental income attributable to the 60-70% you have transferred to son.

4 IT
does your son want to become a landlord and be liable for income tax on his share of the rent ?

Thank you so much - you are most helpful. We are never likely to be able to claim means tested benefits.
The house was valued at £85K in 1999 and similar houses are for sale at £240K


My son wants to live in the house himself not rent it and get an income.

antrobus

booksurr wrote: »

....Furthermore a transfer to your son would count as a "disposal" and trigger an immediate CGT liability which because it is your son - "a connected person". ....

On a point of order.

Where a person gives away a personal possession, this is treated as a disposal at open market value for UK capital gains tax (CGT) purposes (section 17 Taxation of Chargeable Gains Act 1992 (TCGA 1992))

http://www.step.org/lifetime-gifts

A gift to anyone other than your spouse or civil partner would count as a disposal for CGT purposes and deemed to be at market value. Being a 'connected person' isn't relevant for this purpose.

Mrs_pbradley936

When you say current market value, is it good enough to give similar sized houses in the same postcode when working out your calculations?

booksurr

Mrs_pbradley936 wrote: »

When you say current market value, is it good enough to give similar sized houses in the same postcode when working out your calculations?

you can use any values you want but at the end of the day the figure which will count is that which the Valuation Office Agency tell HMRC should be used - and that applies to both the probate value and the disposal value assuming that no IHT was paid at date of probate (and therefore technically the probate value has not yet been ascertained)

so to avoid unnecessary surprises it may be better to get a professional valuation done so you at least have a better chance that the VOA will agree with the figures you use in your tax return

booksurr

Mrs_pbradley936 wrote: »

Thank you so much - you are most helpful. We are never likely to be able to claim means tested benefits.
The house was valued at £85K in 1999 and similar houses are for sale at £240K

My son wants to live in the house himself not rent it and get an income.

presumably then the only reason for transferring 60-70% instead of the whole amount is some attempt at IHT planning?

As you will lose the rental income so your retaining part ownership has little point why not just give him the full 100%, pay the CGT, both live for 7 years, and so have done with it

booksurr

antrobus wrote: »

On a point of order.

Where a person gives away a personal possession, this is treated as a disposal at open market value for UK capital gains tax (CGT) purposes (section 17 Taxation of Chargeable Gains Act 1992 (TCGA 1992))

http://www.step.org/lifetime-gifts

A gift to anyone other than your spouse or civil partner would count as a disposal for CGT purposes and deemed to be at market value. Being a 'connected person' isn't relevant for this purpose.

so when do you think connected persons is relevant? http://www.hmrc.gov.uk/manuals/cgmanual/CG14560.htm
http://www.hmrc.gov.uk/manuals/cgmanual/CG14541.htm
providing a link to an article primarily aimed at IHT related issues is hardly a point of order

BTW: personal possessions = "tangible and moveable" asset http://www.hmrc.gov.uk/cgt/possessions/basics.htm with a £6k threshold for CGT irrespective of whether it was a gift or a sale
http://www.hmrc.gov.uk/cgt/possessions/calc-cgt.htm

property = property, it is not the same as a personal possession, hence the very specific HMRC guidance on transfers of property to connected persons

xylophone

2. Deprivation of assets
as it is a gift if you ever need to claim means tested benefits (eg care home funding) you would be held to have deliberately given away a chunk of your capital and therefore your means test would be assessed on the basis you still owned it so you would get a reduced claim

As the parents are relatively young and (I assume) in good health, and have a home and other assets and can state that the transfer to their son is sensible IHT planning, this is possibly less of a concern.

I inherited a house in 1999

The OP does not make it clear when she transferred half (?) the equity to her spouse - if this were after some time had elapsed so that there was quite a disparity between probate value and market value, would this make any difference to the amount of CGT that had to be paid by the spouse?

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

Mrs_pbradley936

xylophone wrote: »

As the parents are relatively young and (I assume) in good health, and have a home and other assets and can state that the transfer to their son is sensible IHT planning, this is possibly less of a concern.



The OP does not make it clear when she transferred half (?) the equity to her spouse - if this were after some time had elapsed so that there was quite a disparity between probate value and market value, would this make any difference to the amount of CGT that had to be paid by the spouse?

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

I was not the executor for the will but I am almost sure I asked the solicitor to put it in joint names when the paperwork was being sorted out. I do not recall owning the house and then giving half to my husband, but if I had to own it first then I would have given him half within a very short space of time. So we are talking days/weeks not several years.

booksurr

xylophone wrote: »

The OP does not make it clear when she transferred half (?) the equity to her spouse - if this were after some time had elapsed so that there was quite a disparity between probate value and market value, would this make any difference to the amount of CGT that had to be paid by the spouse?

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

no effect at all

transfers between spouses are on a no gain no loss basis, meaning the recipient gets the property at the donors original cost - so does not matter if it were 1 minute or 20 years later, the wife "inherited" her share at probate value