Capital gains tax

Poppy9

A friend asking for advice.  Parents gifted house to their child in 2001 - value 80k.  The child already owned their own home with their family so owned 2 homes at this point.  Their parents continued to live in home for another 10 years until they died.   Since then the house became a renovation project that took 8 years and £15k and was then rented out.  Current value approx £250k.  Now due to ill health they wish to dispose of one house and think they should maybe move into the fully refurbished house and sell current home.  They assume no CGT in selling current home as been main residence since purchase in 90s.  However if after living in other home and they need to move again will there be a CGT liability on this home if they sell ? 

AdrianC

CGT is pro-rated for the period of residence, plus a taper of 9 months.

Let's say they move soon, and sell it in 2026.
They will have owned the place for 25 years, of which they were non-resident for 5yrs + 9 mo taper (let's call that a nice round 6yrs for ease of illustration).

6/25ths is 24%, so they pay CGT on 76% of the gain during their ownership.

oldbikebloke

yes, CGT would be due on sale of "refurbished" property as it was not their home from date of gift to date they moved into it 

i very much doubt 15k would all be capital expenditure even on a property with a modest 80k start point, so lets ignore that attempt to claim costs

250 - 90 = 170 gross gain, sole ownership (you say gifted to child) so potential gain of around 157,700 after one CGT allowance *(12,300 at today's rate)
sticking with adrian's example above, worst case scenario 157,700 x 76% = 119.852 all at 28% tax rate = £33,558 tax payable 

textbook example of parents leaving a tax legacy to their children whilst thinking they were evading IHT on a property that was never valuable enough to face it in the first place. And by continuing to live in it themselves the gift was not exempt IHT anyway hence the textbook phrase "double tax whammy"

AdrianC

oldbikebloke said:

textbook example of parents leaving a tax legacy to their children whilst thinking they were evading IHT on a property that was never valuable enough to face it in the first place. And by continuing to live in it themselves the gift was not exempt IHT anyway hence the textbook phrase "double tax whammy"

At least they avoided finding out that it would have been viewed as deprivation of assets, so still liable to cover care costs...

Keep_pedalling

As I’ll health is the main driver for this they should really should prioritise finding a suitable house for their later years rather than move in somewhere not suitable just to save some CGT. 

Poppy9

Thanks for advice , it is as they thought . As the house had been fully renovated - they do have the bills for all the work, they think easier to move in there than stay in current home which they were thinking of doing work on it next year but they don't want hassle of living on it more hassle of having a rental though. 

Last question of the couple become remnants in common they both then have an annual allowance but the ownership profit is pro rata to profit on period of ownership I assume.  

oldbikebloke

Poppy9 said:

Thanks for advice , it is as they thought . As the house had been fully renovated - they do have the bills for all the work, they think easier to move in there than stay in current home which they were thinking of doing work on it next year but they don't want hassle of living on it more hassle of having a rental though. 

Last question of the couple become remnants in common they both then have an annual allowance but the ownership profit is pro rata to profit on period of ownership I assume.  

let me reiterate - just because they have bits of paper does not make all £15k into capital expenditure, some of it may be classed as revenue expenditure ie "maintenance" not "improvement" costs.

who are "the couple"? I note the gift was from parents to their children, so is the couple in fact sibling offspring rather than being a child and their own spouse?
If the two sibling children as the two owners of the property, and hold that under TIC then the default is 50/50 UNLESS there is a documented deed / declaration of trust backing up that legal status recording a different share split. If there is, then the profit is split according to the respective share owned which is then itself pro rated as previously explained between exempt and liable % 

Poppy9

No parents gifted house to their only child.  That child is married and has 4 children (age 18-24) and own outright their own home .  

I was interested but we have a financial advisor who we met with before lockdown but we've only done our will so far !  We have 1 child and own two homes !  Our home approx £400k and house we inherited and bought sibling out of at time of inheritance.  Value of house then 2011 £90k now about £135k.  We rent this house out and my husband and myself own jointly .  We retired early so it supplements our pensions.   

Regarding friends house they replaced all windows , installed new central heating system , knocked down walls to change kitchen & bathroom, created new utility room, rebuilt garage abs replaced driveway.  Most of work done personally just buying in materials and fixtures .  

oldbikebloke

Poppy9 said:

A friend asking for advice.  Parents gifted house to their child in 2001 - value 80k.  The child already owned their own home with their family so owned 2 homes at this point.  Their parents continued to live in home for another 10 years until they died.   Since then the house became a renovation project that took 8 years and £15k and was then rented out.  Current value approx £250k.  Now due to ill health they wish to dispose of one house and think they should maybe move into the fully refurbished house and sell current home.  They assume no CGT in selling current home as been main residence since purchase in 90s.  However if after living in other home and they need to move again will there be a CGT liability on this home if they sell ? 

Poppy9 said:

No parents gifted house to their only child.  That child is married and has 4 children (age 18-24) and own outright their own home .  

I was interested but we have a financial advisor who we met with before lockdown but we've only done our will so far !  We have 1 child and own two homes !  Our home approx £400k and house we inherited and bought sibling out of at time of inheritance.  Value of house then 2011 £90k now about £135k.  We rent this house out and my husband and myself own jointly .  We retired early so it supplements our pensions.   

Regarding friends house they replaced all windows , installed new central heating system , knocked down walls to change kitchen & bathroom, created new utility room, rebuilt garage abs replaced driveway.  Most of work done personally just buying in materials and fixtures .  

the friend's situation has been explained. That sole owner will face CGT on the property given to that person when they sell it .
Re items mentioned as possible capital expenditure:
- double glazing is a specific example mentioned in the "not" rule.
- Knocking down walls was not creating new space, merely remodelling the existing area, but you may want to argue over that one under "extensive alterations" rule 
- rebuilding a garage would be capital.
- Driveway depends on extent of works - repair or replace?
this is covered in the property income manual looking at it from of view can the cost be claimed against rental profits, if not, then obviously the principle is established it a capital cost for CGT 
https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim2030

if you are asking about your now own rental property then transfers between spouses as you are are effectively exempt for CGT at the point of transfer, so even if you rather than "we" inherited it, as it is now joint ownership the respective CGT position of each owner will be based on the probate value at inheritance so current gain (135-90) x share owned (50/50?) less allowance = each person will have a respective taxable net gain 

Poppy9

Yes we inherited as mother in law put in her will 1/4 to each child and spouses so I acquired a further 1/4 snd my hubby a second quarter when we bought out sister & hubby .  We've done little work to it aside from putting in a complete new bathroom last year so know after our CGT allowance we have to share the CGT on remaining gain . The rental income over last 9 years covered this as it's a modest gain but we are under discussion with out financial advisor as our main property is gaining value at much higher rate we need to try not to leave our child with IHT issues .