Capital gains question.

SuperHan

CGT is based on beneficial ownership, not legal ownership. Therefore if your sister beneficially owns 20% then that portion of the gain would fall on her (although would be exempt as her PPR).

HMRC may require evidence of this, the document you have to show this was the agreement will be helpful. As will showing the less-than-market rent as evidence she was only paying rent on the portion she didn't own. 

I would report the gain split three ways, but expect queries to be raised by HMRC.

To the PPs who have disagreed with this - what do you see the sister's windfall from this property as being? A PET from the OP? To my mind, it's clearly a return on her original 20% investment, and so would be subject to CGT in its own right. 

SDLT_Geek

Whether or not the SIL has had a beneficial interest from the time of the purchase will depend an a proper analysis of all the facts, including:
1.  Who provided the money for the purchase.
2.  What was said on the transfer (TR1) of the property. 
3.  What was said to lenders at the time.
4.  What was put into writing at the time.
5.  Who was named as the “purchasers” on the land transaction return.
Some of these may conflict with each other.

mikepie

Well thats cleared that up 
I have just posted the same question on the Land Registry Blog to see what they say.  Will let you know if I find anything.

mikepie

SDLT_Geek said:

Whether or not the SIL has had a beneficial interest from the time of the purchase will depend an a proper analysis of all the facts, including:
1.  Who provided the money for the purchase.   Mortgage in my and wifes name taken out on our property ( not the one in question) My savings and equity from sale of SIL old house.
2.  What was said on the transfer (TR1) of the property.   Nothing about SIL
3.  What was said to lenders at the time.  Nothing as we were re-mortgaging our house to release cash rather than taking out a mortgage to buy a property.
4.  What was put into writing at the time. Just an un-official  hand written agreement between us and SIL
5.  Who was named as the “purchasers” on the land transaction return.  Myself and Wife

oldbikebloke

mikepie said:

SDLT_Geek said:

Whether or not the SIL has had a beneficial interest from the time of the purchase will depend an a proper analysis of all the facts, including:
1.  Who provided the money for the purchase.   Mortgage in my and wifes name taken out on our property ( not the one in question) My savings and equity from sale of SIL old house.
2.  What was said on the transfer (TR1) of the property.   Nothing about SIL
3.  What was said to lenders at the time.  Nothing as we were re-mortgaging our house to release cash rather than taking out a mortgage to buy a property.
4.  What was put into writing at the time. Just an un-official  hand written agreement between us and SIL
5.  Who was named as the “purchasers” on the land transaction return.  Myself and Wife

In your first post you state SIL "put the equity into the bungalow - about 20%". The question asked was where did the money come from, and the answer to that appears to be from all 3 of you

As has been correctly flagged earlier in the post, CGT is based on beneficial ownership, not legal.
Taxation of Capital Gains Act 1992 section 1 para 1 
CG11700P - Capital Gains Manual - HMRC internal manual - GOV.UK (www.gov.uk)

If sister paid 20% of the purchase price using her own money, and moreover now stands to receive that money from the sale because it is being spent on the purchase of a new place she will live in, then she has a strong case to state that she was, and is, a beneficial owner of the sold property. The fact she was not party to a mortgage is irrelevant, the mortgage merely explains how you funded your share of the purchase cost. The rest of the cost was paid by SiL

Given the loan was secured on your own house, not SiL's what you told the lender about "ownership" of the property that money was being spent on when borrowing it is a matter between you and them (ie. irrelevant). It has no bearing on tax where the purchase funds came from.

The fact the land registry records do not record the existence of a "restriction" does not preclude the existence of a trust between you and Sil. SiL (part) paid to purchase it, lived in it, and will benefit (financially) from its sale. Your line therefore needs to be that whilst the legal ownership has never referenced SiL, the fact remains your document establishes a beneficial ownership right for SiL as your "document" establishes who gets what of the money when the property is sold and is therefore evidence of "The Trust" proving beneficial ownership backed up by the hard evidence of money from Sil and money from you coming together to pay the purchase (one hopes each of you have retained bank records to show that!).

steampowered

SuperHan said:

CGT is based on beneficial ownership, not legal ownership. Therefore if your sister beneficially owns 20% then that portion of the gain would fall on her (although would be exempt as her PPR).

This is the answer to the Op's question.

CGT is payable by the person who receives the money - it is a personal tax, not a property tax. The beneficial ownership position and the funds position need to match up. You cannot use your sister's CGT allowance if you are going to take the money.

For example, if you are taking the view that your sister has a beneficial interest in 20% of the property, she must receive 20% of the sale proceeds. 

The Op must pay CGT on the difference between what they put into the property and what they are getting out from it.

mikepie

Thankyou steampowered and oldbikebloke.   That makes sense