Capital Gains and Primary Residences

silvercar

00ec25 wrote: »

the issue at hand is if you can show that the only reason you purchased the property was to provide a residence for your mother whilst she was alive, ie, it was held on trust for her whilst she had a "life interest" in it, then, and only then, would you be able to claim partial exemption

note the word partial.
Mother died. From the date of her death onwards any life interest died with her, and you are certainly liable to CGT from then until sale in 2017.

please stop and take a reality check...
yes i know you resent paying tax
yes i know this may be the most money you'll ever get in your life
BUT, if you try and establish mother was the beneficial owner and thus you inherited the property on her death free of CGT to the date of her death, you will probably spend more in legal and professional fees than if you just paid the CGT and had done with it

I agree with all this. A calculation of the CGT that would be due if the starting point was the value at the time of your mother's death in 2015 rather than earlier will give you an indication if it is worth disputing. You don't want to be hit with IHT and CGT!

DJ81

The CGT as of now would be ~25k (as per the .gov website) and even if you take the latest valuation of the flat (recent sale price), combining this with my mother's estate would not produce an amount larger than the £325k total estate threshold (above which I understand you would pay tax). So yes, I might waste some money on further legal fees (whoever I employ might not be able to produce the tax opinion required to legitimately not pay the full CGT), but at least I now potentially have the weighted sum in front of me to evaluate:

Probability(I manage to achieve the inheritance opinion) * (legal fees + inheritance tax (I believe would be zero) + fraction of CGT[2015-2017]) + Probability(I don't achieve the inheritance route) * (full CGT + wasted legal fees)

...If Prob() is high enough or Legal Fees are low enough and/or depending on how the fraction is calculated, potentially it makes sense to pursue further.

Related to that fraction, I have it in the back of my mind from previous reading that a partial valuation like this ignores any realistic year to year fluctuations (from 2015-2017) and is a simple straight line appreciation from purchase date to sale date, with the 'implied appreciation' for the period you are interested in calculated as:
total appreciation * fraction of total ownership period --> so here would be X * (date of sale - date of death) / (date of sale - date of purchase) - is that correct or is it different given in this situation I would have inherited the property in 2015 and therefore didn't own it before that point? If it is different, how would one estimate the past valuation of a flat...you make a reasonable effort based on similar properties in the area from Land Registry figures etc.?

I don't disagree that this is beyond a long shot and to preempt any backlash from this post, tax that needs to be paid will be paid, but as you allude to, the only way you can fully decide whether to pursue this is if I have all the elements of the equation...

As always, very grateful for the replies and information.

00ec25

if you successfully manage to establish that the property was held in trust for the mother then you inherited it in 2015 at its then market value. Your CGT would be the gain from that value in 2015 to its sales price in 2017. You would have no tax relief other than your personal allowance. Establishing the 2015 value will require a professional valuer since you stand a good chance of having HMRC call your tax return for inspection.

your formula above is pretty but wrong, it should read:
sales price 2017 - cost of selling (legal fees and EA as applic) - 2015 market value (there are no purchase costs or legal fees associated with an inheritance that can be offset against CGT) - valuer's fees = gross gain
gross gain - personal allowance = taxable gain

Historic valuations are the remit of professional valuers. The obvious place to start is with a qualified, registered Chartered Surveyor who specialises in (and holds) the valuation accreditation given by that institute. RICS surveyors of such ilk can be found here: (select the valuation accreditation in the search filter)

https://www.rics.org/uk/find-a-member/

as mother's estate did not pay inheritance tax, nor was the property part of her estate at death, by the time you get round to reverse engineering it into her estate HMRC will not accept a probate value as having been "ascertained". Therefore, bear in mind HMRC will use a District Valuer to check your figures. HMRC's valuation is final, if you want to contest it you'll need a RICS person with the credibility and experience to argue before a Valuation Tribunal, it is not territory for DIYers. It will also not be cheap. You can have some forewarning of HMRC's attitude to your own valuation by submitting a CG34 form - the costs of doing the form are allowable. The costs of appearing at Tribunal are not

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg15260

https://www.gov.uk/government/publications/sav-post-transaction-valuation-checks-for-capital-gains-cg34

DJ81

Thank you very much, all very informative.

Crashy_Time

00ec25 wrote: »

the issue at hand is if you can show that the only reason you purchased the property was to provide a residence for your mother whilst she was alive, ie, it was held on trust for her whilst she had a "life interest" in it, then, and only then, would you be able to claim partial exemption

note the word partial.
Mother died. From the date of her death onwards any life interest died with her, and you are certainly liable to CGT from then until sale in 2017.

please stop and take a reality check...
yes i know you resent paying tax
yes i know this may be the most money you'll ever get in your life
BUT, if you try and establish mother was the beneficial owner and thus you inherited the property on her death free of CGT to the date of her death, you will probably spend more in legal and professional fees than if you just paid the CGT and had done with it

Good advice. Just pay the tax and move on IMO.