Capital gains question.

mikepie

First post so be easy on me please    All advice much appreciated.
10 years ago my sister in law was struggling with her health and therefore work and could no longer afford to live/pay the mortgage on the house she owned.
To get out of this mess she sold her house and put the equity into a small bungalow (about 20%) and myself and my wife invested our savings and got a mortgage for the balance.  Though she has invested in the property it is in just myself and my wifes names - it was simpler to do it this way.
We have been charging her about half the normal rent and paid off the mortgage a few years ago.
Now my sister in law wishes to move back to where she came from so we are selling the bungalow to purchase a property for her near where she grew up.
The problem we have is that the property is worth a lot more than when we bought it and capital gains tax is going to compromise our budget for the new house.  Total gain is about £68k
My questions are:
1  Can we use my sister in laws's capital gains allowance (ie split the CGT 3 ways) even though she is not a registered owner of the property?  
2  If the answer to 1 is yes am I correct to assume she will not need to pay any tax on her share as she lived in the property?
3  Do we have to prove/declare that she is a part owner or just pay the CGT on our share?
4  Is there any other way of avoiding or reducing CGT in this circumstance?
Thankyou
Mike

Slithery

1 - No.

The rest of your questions are irrelevant. As the only legal owners just you and your wife are liable for the CGT so only your allowances can be used.

Hopefully you have been fully declaring the rental income to HMRC and paying the relevant tax on it for the last ten years otherwise the CGT is the least of your worries...

greatcrested

The property belongs to you and your wife. Not only that but you have been your sister-in-law's landlords.

Therefore you are both of you liable for tax on the income she paid you, and for the CGT on the growth in property value.

This latter you should be grateful for - you've made a good investment and a good profit!

I asume you've been complying with the 83 statutory and regulatory requirements of landlords.

Of course, you can each use your indiviual CGT allowance, currently £12,300 each.

Don't forget you have only 30 days from Completion of the property sale to submit your tax return and pay the CGT.

mikepie

OK  I thought that might be the case.
We have been declaring the rental income and complying with regs 
Thankyou
Mike

GDB2222

I really strongly disagree with the two posts above. 

When you all bought the property, what was agreed about ownership? The sister in law must own some of it, as she paid a large chunk of the purchase cost. Indeed, she may have paid the majority of the deposit and arguably owns the majority of it. In practice, although you and your wife took out the mortgage it is not clear whether this was on behalf of sister in law, and she has been paying it off through her payments to you?

The names on the land register are only part of the picture, and you need to look at the beneficial ownership. I hope you have this written down, but if not it’s high time this is all documented. Worse still, you may never have agreed anything formally, but that still doesn’t mean that the whole place belongs to you. If this went to court (and I am not suggesting it would) the court would most likely award part of the house value to SIL.

SDLT_Geek

GDB2222 said:

I really strongly disagree with the two posts above. 

When you all bought the property, what was agreed about ownership? The sister in law must own some of it, as she paid a large chunk of the purchase cost. Indeed, she may have paid the majority of the deposit and arguably owns the majority of it. In practice, although you and your wife took out the mortgage it is not clear whether this was on behalf of sister in law, and she has been paying it off through her payments to you?

The names on the land register are only part of the picture, and you need to look at the beneficial ownership. I hope you have this written down, but if not it’s high time this is all documented. Worse still, you may never have agreed anything formally, but that still doesn’t mean that the whole place belongs to you. If this went to court (and I am not suggesting it would) the court would most likely award part of the house value to SIL.

Good point.  I wonder what was said to the lender about who the beneficial owners were?  Some good evidence could be the land transaction return, as the "purchasers" named on that should be the beneficial owners, so should have included the SIL if she had an underlying beneficial share.

mikepie

GDB2222  My sister in law owns about 20% of the property but this is not on the land transaction return or any other official documentation.  All we have is a document we drew up for our own information after the property was purchased showing who owns what.  Theoretically I guess this puts SIL at risk but neither my wife nor I are the sort to rip her off. 
I have since paid off the mortgage with a combination of what would have been my pension payments and SIL's rent so we have gained equity from this transaction though my pension has suffered.  I dont have a problem paying CGT I just would prefer not to have to pay it on the bit that is not ours and since SIL has been living in the property she wouldn't have to pay anything on her share!
So I posted on this forum to see if we could pay CGT on our share only which reduces the bill by about 4k.
If the limited unofficial documentation we have is insufficient to prove part ownership by SIL then do we just go ahead and worry about proving it if anyone asks or just take it on the chin and pay up the full amount?
It is not worth getting into trouble for 4k!

AdrianC

mikepie said:

My sister in law owns about 20% of the property but this is not on the land transaction return or any other official documentation.

Then she doesn't own it. LR shows who own it. If they don't show her owning it, she doesn't own it. Any of it. You own 100% of it.

theartfullodger

AdrianC said:

mikepie said:

My sister in law owns about 20% of the property but this is not on the land transaction return or any other official documentation.

Then she doesn't own it. LR shows who own it. If they don't show her owning it, she doesn't own it. Any of it. You own 100% of it.

SiL may well have a beneficial interest not shown on the LR deeds. 

But something smells fishy, perhaps to do with fiddling tax (become very cynical this new year...)

GDB2222

AdrianC said:

mikepie said:

My sister in law owns about 20% of the property but this is not on the land transaction return or any other official documentation.

Then she doesn't own it. LR shows who own it. If they don't show her owning it, she doesn't own it. Any of it. You own 100% of it.

Sorry to be rude, but this is simply wrong. 

Please, if you’re not 100% certain of the answer, make that clear. Otherwise, you risk misleading the OP. I’m sure you would not do that deliberately. 

Of course, if it’s a matter of opinion (is blue the best colour, for example) your opinion is as valid as the next man's. But, that’s not the case here. 

If there’s an agreement setting out the beneficial ownership, then that’s what counts. If the mortgage is now paid off, then it would be best that SIL is put on the land register as one of the legal owners. I assume that this was not done originally because of the mortgage? 

There is a Land Registry article about this here
https://hmlandregistry.blog.gov.uk/2016/08/16/legal-estates-beneficial-interests-whats-difference/

GDB2222

mikepie said:

GDB2222  My sister in law owns about 20% of the property but this is not on the land transaction return or any other official documentation.  All we have is a document we drew up for our own information after the property was purchased showing who owns what.  Theoretically I guess this puts SIL at risk but neither my wife nor I are the sort to rip her off. 
I have since paid off the mortgage with a combination of what would have been my pension payments and SIL's rent so we have gained equity from this transaction though my pension has suffered.  I dont have a problem paying CGT I just would prefer not to have to pay it on the bit that is not ours and since SIL has been living in the property she wouldn't have to pay anything on her share!
So I posted on this forum to see if we could pay CGT on our share only which reduces the bill by about 4k.
If the limited unofficial documentation we have is insufficient to prove part ownership by SIL then do we just go ahead and worry about proving it if anyone asks or just take it on the chin and pay up the full amount?
It is not worth getting into trouble for 4k!

We had a somewhat similar situation, and HMRC accepted the document we had. What you have done is perfectly proper, and you won’t be in trouble. You may have to explain the situation to HMRC , or they may just accept it without question.