Capital Gains

rose28454

My friend bought a house 2 years ago but could not get a mortgage ( due to his being self employed ) but had a deposit of £30000. So his parents got the mortgage of £108000 and he paid them the payment each month. Now he has managed to get a mortgage and is in the process of transferring the house into his name and paying the new mortgage himself. His financial advisor has now said that his parents will be liable for capital gains on the increase in value. The house is now worth about £170000. When they set up this arrangement originally they were not told of this. Is the advisor right?

silvercar

If you can persuade the inland revenue that the parents only got the mortgage because the friend was not able to, and the friend has been the beneficial owner of the property for the whole time, the IR should accept that the property is the friends principal private residence and not expect a CGT payment.

From the brief facts you give this should be possible.

dunstonh

His financial advisor has now said that his parents will be liable for capital gains on the increase in value. The house is now worth about £170000. When they set up this arrangement originally they were not told of this. Is the advisor right?

That is technically correct.

As far as HMRC are concerned, the parents owned the property and are liable to CGT on the gains. They would also treat the your friends payments to the parents as taxable income so if the parents havent disclosed that, they could also be liable to income tax and a possible fine or prosecution if they get found out.

The interest only element of the payment can be offset against the income but any surplus is taxable.

I dont know if the HMRC would accept the story or not as I have no experience of anyone trying it. However, on paper and assuming they dont accept it, then there is a tax liability.

EdInvestor

What was the purchase price of the property, what is the gain?

Was it in both parents names?

The gain may be much less than you think after reliefs.

Note that the CGT rules have also just changed, and from next April the tax rate will be only 18% down from 40% in some cases.It may be wise to delay the transaction until then.

But post the info so we can check.

silvercar

Post your question on the tax board or on taxationweb board. It is definitely possible as there is a difference between beneficial ownership and legal ownership.

In fact a quick question to your tax office may yield the answer you are looking for. Emphasise that the reason for the property being in the parents name was to secure the mortgage.

You would be better pointing this question to a solicitor or accountant rather than a financial advisor. A friend of mine has secured exactly the result you are looking for, in very similar circumstances, through her solicitor.

rose28454

EdInvestor wrote: »

What was the purchase price of the property, what is the gain?

Was it in both parents names?

The gain may be much less than you think after reliefs.

Note that the CGT rules have also just changed, and from next April the tax rate will be only 18% down from 40% in some cases.It may be wise to delay the transaction until then.

But post the info so we can check.

The purchase price was £138000, it was in both parents names, The property is now worth about £160000.
Many thanks

silvercar

£22,000 gain, less purchase and selling costs (legal and estate agents), less £9,200 allowance each = peanuts in CGT!

My friend stood to lose tax on £55,000 so it was worth paying for professional advice!

Similar thread with advice from an ex tax inspector:

http://forums.moneysavingexpert.com/showthread.html?t=472035&highlight=beneficial+ownership+CGT