Capital Gains Tax on Gifts

Gerontion

Hi,

Basically - I have co-owned and lived in a property the past eight years. Tenants in common with my father. My father has never lived at the property.

I'm in the process of remortgaging the place so it's in my name.

All was going swimmingly until by chance I read an article on Capital Gains Tax. The very day I got the mortgage offer. My dad was planning to gift me his share of the house - we now realise, or strongly suspect, there is going to be a tax bill in the thousands for him doing so. We had no idea CGT was paid on gifts of property at their market value.

I know this is a hail Mary but are there any legitimate ways round this? Obviously it's my father's tax obligation and his mistake - but as it is he can't really afford to give his half of the house away. Well he can but it would almost wipe out his retirement savings. We're not super rich, my dad and I went in on the house together before I was earning. He sold the family home, and was able to afford half the deposit on the place I'm living in by downsizing and buying his current house outright. My half I got from a small inheritance. Since then I've done my part and got to a position where I can afford a mortgage on my own terms. Like I say I got to the mortgage offer stage. It was always the plan for me to take ownership of the mortgage and the house once I was earning enough. He wants to retire and not worry about debt, but it looks like he's going to be saddled with it for another 10 years or have to pay a huge tax bill.

I'm also curious as to at what stage this would have been brought to our attention. I know, I know it's on my dad to know what he needs to pay tax on, but if he'd received a letter after completion from HMRC this would have been an unmitigated disaster. Does a mortgage advisor have a duty of care to inform? I told her my dad was gifting his equity to me and CGT wasn't mentioned. Would the solicitor have brought it up at some point?

[Deleted User]

Gerontion wrote: »

Hi,

Basically - I have co-owned and lived in a property the past eight years. Tenants in common with my father. My father has never lived at the property.

I'm in the process of remortgaging the place so it's in my name.

All was going swimmingly until by chance I read an article on Capital Gains Tax. The very day I got the mortgage offer. My dad was planning to gift me his share of the house - we now realise, or strongly suspect, there is going to be a tax bill in the thousands for him doing so. We had no idea CGT was paid on gifts of property at their market value.

I know this is a hail Mary but are there any legitimate ways round this? Obviously it's my father's tax obligation and his mistake - but as it is he can't really afford to give his half of the house away. Well he can but it would almost wipe out his retirement savings. We're not super rich, my dad and I went in on the house together before I was earning. He sold the family home, and was able to afford half the deposit on the place I'm living in by downsizing and buying his current house outright. My half I got from a small inheritance. Since then I've done my part and got to a position where I can afford a mortgage on my own terms. Like I say I got to the mortgage offer stage. It was always the plan for me to take ownership of the mortgage and the house once I was earning enough. He wants to retire and not worry about debt, but it looks like he's going to be saddled with it for another 10 years or have to pay a huge tax bill.

I'm also curious as to at what stage this would have been brought to our attention. I know, I know it's on my dad to know what he needs to pay tax on, but if he'd received a letter after completion from HMRC this would have been an unmitigated disaster. Does a mortgage advisor have a duty of care to inform? I told her my dad was gifting his equity to me and CGT wasn't mentioned. Would the solicitor have brought it up at some point?

I'm slightly confused. It sounds like you and your dad jointly purchased a property together 8 years ago, you using money from an inheritance and your dad from releasing some equity, without the need for a mortgage. Your dad is now gifting you his share of the equity, if that's the case why do you need a mortgage?

Regardless of whether you buy your father's share from him at market value or if he gifts you his share of the equity for nothing he will be assessed as having disposed of his asset at full market price for the purposes of CGT. It is not your mortgage broker's responsibility to advise you on your tax matters and it is certainly not your broker's responsibility to advise you on your father's tax matters, the broker's job is to find you the best mortgage for your circumstances. Likewise, it is not the responsibility of your solicitor to advise you on your father's tax matters. It is however your father's responsibility to report to HMRC that he has disposed of his asset by way of self assessment.

How much of a taxable gain has your father made on this property? Has his share of the property risen in value by over £12,000? In the 2019/20 tax year everyone gets a £12,000 GCT allowance before they have to start paying CGT so if his gain is less than this there will be no CGT to pay.

GCT is based on beneficial ownership of the property not legal ownership. Is there a Deed of Trust setting out the beneficial ownership of the property? If there is not then it may be worth you and your father spending some money on professional advice from a solicitor and/or accountant to find out if your father can claim that he is not a beneficial owner of the property and have a retrospective Deed of Trust drawn up.

Gerontion

Thanks.

We jointly took out the mortgage eight years ago. We did not buy it outright. Half the deposit for the mortgage came from my dad half from me. My dad, separately, bought a house up north outright for himself to live in. Sorry if I confused that point. We still have ten years on the current mortgage and I have had a mortgage offer and lots of forms from solicitors which, if accepted, will result in myself being responsible for the the remainder of the loan and being the sole owner of the property.

We're looking at a figure of around £90k based on the index value now versus 8 years ago (for the property as a whole). He'd be liable to pay tax on half of that at 18% less the £12,000 allowance (which I hadn't factored in so that brings it down quite a bit - thank you!). But still a large sum of money.

"GCT is based on beneficial ownership of the property not legal ownership. Is there a Deed of Trust setting out the beneficial ownership of the property? If there is not then it may be worth you and your father spending some money on professional advice from a solicitor and/or accountant to find out if your father can claim that he is not a beneficial owner of the property and have a retrospective Deed of Trust drawn up." - Nope no deed of trust, but yes we will take legal advice on what you've said. Many thanks.

I do appreciate what you've said. We should have done more research before jumping into this. At least we know now rather than after completion that there may be a tax bill for my dad involved.

But honestly, as much as I whine, it's pretty much credit card territory, especially after the £12k allowance. We'll sort something out.

Thanks Again.

getmore4less

The only way to avoid the CGT bill will be to wait till he dies but that will also mean you are stuck with this property till then.

Did your father pay any of the mortgage or any maintenance improvements.

If the only moneys paid were his share of the deposit you might be able to claim that was his only beneficial interest at the point of purchase.

Retrospective deed not so sure, but there might be a resulting/implied trust in place by the actions of who paid the mortgage and maintenance etc.

AdrianC

Gerontion wrote: »

My dad was planning to gift me his share of the house
...
but as it is he can't really afford to give his half of the house away.

Well, it's not as if his 50% ownership of a property he lives in is currently bringing him any income, so it's not as if ownership is making any difference to his finances.

He pays CGT on the growth in value between the asset when he bought it and when he disposes of it. CG = Capital Gains. It's the gain in capital which is taxed.

So if the house has increased from £200k to £250k since purchase, he pays tax on the increase from £100k to £125k - he pays tax on £25k. If this is his only CGT-liable disposal in the tax year, the first £12k is exempt - so he's paying it on £13k, at 28% - he'll pay £3,640.

That's a massive simplification, but you can see that compared to a gift of £125k of assets, a £3.5k tax bill on £25k of asset growth is not the be-all-and-end-all.

https://www.gov.uk/capital-gains-tax/

I'm also curious as to at what stage this would have been brought to our attention

Your father's tax return is 100% his responsibility. It's nobody's job to bring anything to his attention, unless he pays an accountant to do so.

Does a mortgage advisor have a duty of care to inform?

No. Not least because the mortgage advisor isn't advising your father - they're advising you.

I told her my dad was gifting his equity to me and CGT wasn't mentioned. Would the solicitor have brought it up at some point?

Perhaps your father's solicitor would have, but his job there is simply to arrange the transfer paperwork.

silvercar

Can he transfer shares in the property to you over the next 4 years? So each year will be under the £12,000 CGT allowance. So now you own 50/50, next year 62.5/37.5, then 75/25.......
Given any tax return for 2018/19 isn't due until 31 Jan 2020, he could probably retrospectively make last year the first year.

00ec25

Gerontion wrote: »

We're looking at a figure of around £90k based on the index value now versus 8 years ago (for the property as a whole). He'd be liable to pay tax on half of that

you are suggesting the property has increased in value by 90k, ie the difference between the original purchase price and its current market value.
As you also imply 50/50 ownership, then yes, he would be liable for CGT on 90/2 = 45,000 less his 12,000 cgt allowance = 33,000

provided all his other income (wages, pension, taxable savings interest etc) come to less than 17,000 then he would pay CGT @ 18% on 33k

if his income is more than 17,000 he will pay SOME tax at 28% because CGT changes to the higher rate of 28% when the total of gain + income is more than £50,000

I somehow doubt he has a 50,000 per year income, so his CGT bill will be no more than £9,240 (all @ 28%) but could be as low as £5,940 (all @ 18%)

As for how to avoid it, the only way is if he is prepared to genuinely gift the entire property to you and get absolutely nothing in return. So he would lose his deposit.
If he is willing to do that, then as suggested above, spend some money on exploring how he can establish he has zero beneficial interest in the property, and therefore is not liable for CGT on its disposal as he will get nothing from it.
Beneficial interest is established by a deed of trust, and for that to be convincing it would need to reflect whatever was said to the mortgage company at the time you and he purchased it. If his deposit was in his name and there was no suggestion it was a gift at that time to you, then he may have an uphill struggle to show he never intended from the outset to get nothing in return.

That said, it is not unusual for a parent to be party to their child's mortgage so as to help the child onto the property ladder, so untangling that at a later date is the sort of work a solicitor experienced in more than just basic conveyancing should be able to do if you specifically ask them if they have such experience.

As for how would HMRC come after him, he could gamble on HMRC's computers missing him, but at the end of the day all changes in ownership of UK property are reported to HMRC and their computer may make the link that he disposed of an interest in a property whilst still owning another one. If he wants to risk it, he may get away with it, but if caught, it will be costly.

As I am sure you appreciate, the scenario you have is a clear case of how money can be passed down a generation and therefore is subject to tax. Doing it whilst still alive potentially avoids inheritance tax and therefore CGT exists to close such a loophole.

Keep_pedalling

If the potential CGT Bill is likely to wipe out his retirement saving, I would suggest he can’t really afford to gift his share in the first place, as it sounds like he has little saving to speak of, and lacking a reasonable cash in your old age is not a place you want to be in.