CGT on family home

thetcutkid

Hi,
I recently took my Mum to a solicitor as she wanted to draw up a will.

Bit of background...I've lived in the family home my entire life (I'm 50), originally with both my parents and then when Dad died a few years back, now just with Mum. I have a sister (53) who is married with a family and lives in her own home. I've never married and have no dependants.

In essence the will is very simple - a 50/50 split of our Mum's estate between my sister and I (we are both executors) with two cash legacies for her two grandsons.

During the meeting the solicitor raised the question of the family home and asked what we planned to do with it.

Both my Mum and Sister feel very strongly that this has always been my home and want it to continue to be so for as long as I want as we are a very close family and have always helped and supported each other wherever we can.

The solicitor mentioned something called a  Life Interest Trust.

Having done a small amount of reading about them and having also talked about it between the three of us over the weekend, we feel this adds another level of legality we're not really sure we need...it also more than doubles the cost of having the will drawn up.

One thing that has stuck with me though is that the solicitor has said that should I chose to sell the house and split the proceeds with my sister, she may be hit for CGT.

Having done a small amount of reading on that too, if my understanding is correct, CGT would only come into play if the value of the house has risen in the time from when my sister and I receive it, to when we want to sell it and then obviously only on her half of the money - is that correct?

I assume we would need to get the house valued at the time of Mum's death and also assume we would need to change the deeds to reflect both my name and my sister's name (I assume we can't sell the house with my Mum's name on the deeds?). It is possible I may not be able to afford to live here, however, if I were to 'give it a go' for a year and then find out I really can't afford it, if the house value had gone up in that 12 months, I take it my sister has to pay CGT on the increase on her half ?

In theory, what happens if we decided to sell straight away but it takes ages to sell, if there was any change in value in that time would CGT again come into play (although I guess the longer a house is on the market you'd be looking at reducing the price which negates the problem).

If an estate is split 50/50 does the house by law HAVE to be put into the names of the the two people mentioned in the will or could I in theory put it into my name solely and then if I decided to sell at some point in the future, give half the proceeds to my sister (although I assume that would be seen as a gift and I then need to live for 7 years ?)

Sorry for the long post, this has thrown us all a bit to be honest as we really thought Mum's will would be very simple but it feels like the CGT thing has really opened a can of worms.

Thanks for your time.

Mickey666

Long post, but here are a few points.
1. On death the house remains within the estate and there is no need for it to be transferred to the beneficiaries before it is sold.  Equally, it can be  transferred before a sale if desired.  So basically it depends on what the beneficaries want to do and how to handle things.  If the house is to be sold and the proceeds distributed then it's generally easier to leave the house in the name of the deceased.

2.  CGT.  The house should be valued on death and if it is sold from within the estate then there will be a CGT liability if it is sold for a higher price than the valuation.     If the beneficiaries intend to sell the house then it's best to obtain the highest possible valuation (subject to IHT reliefs etc)  Conversely, if the house is to be kept, then the lowest possible valuation is preferable   If the house passes to the beneficiaries it passes to them with the probate valuation.  If they subsequently sell then CGT may be payable according to the usual rules.

3. Wills can be varied on the agreement of the beneficiaries.  Thus if the house is to split 50/50 then it would certainly be possible for it to be transferred to just ONE of the beneficiaries on the promise of giving half to the other beneficiary, but such a thing would be very risky for the other beneficiary without some legally-binding paperwork to ensure that the owning beneficiary abides by the promise.  Also, there could be complications in that the other beneficiary would have a financial interest in the property, though I'm not sure how that might play out but worth considering.  If the house is transferred 50/50 to the beneficiaries but only one of them lives in the house then I think the other beneficiary becomes an 'accidental landlord'.  Again, this could bring all manner of complications that need to be considered.  From a CGT perspective, I'd guess that the half-owner who lived in the house as their main residence would not have to pay CGT (because of PRR) but the half-owner who did not live in the house as their main residence would have to pay CGT as it would be treated as a second property as far as they were concerned.

However, just a thought about CGT.  Few people like to pay tax, but CGT is a tax on PROFIT so it's not as if it really costs you anything, it just reduces the gain you make.  It's like paying income tax - you still end up better off at the end of the month after paying income tax.  So yes, plan to avoid any CGT liability of you can, but don't lose sight of the bigger picture of what you want to achieve by letting the tail wag the dog etc.

Keep_pedalling

A LIT makes sense as it provides security for your and protects her inheritance. If you did not put one in place you would be living in a jointly held property with her consent, but if her situation changed and she ran into financial trouble because of redundancy, illness or divorce her share of the house would be classed as an asset that creditors or a divorce court could take into account. 

A LIT dose not effect the situation as regard CGT, unless the beneficiary of the trust is the spouse of the deceased  when it stops CGT being an issue.

Your mother could leave you the house outright, with your will leaving it to your sister, but that is risky for her as you could change it to leave it to the local cats home, or anyone else but her.

When the time comes could you be in a position to buy your sister’s share out?

thetcutkid

Mickey, many thanks for taking the time to write such a detailed reply, it's much appreciated.

So in terms of CGT, it makes no difference whether it's our Mum's name or both mine and my sister's name on the deeds - if a market valuation has been obtained and at the point of sale, the sale price is higher than the valuation, my sister will still be hit for CGT ?

It feels almost like getting the valuation for probate draws a line in the sand and starts the clock ticking - the longer it takes you to decide on what to do, the greater chance there will be for CGT to become an issue as house prices may have risen.

I do take your point (excellently explained btw) that CGT is a tax on the profit only.

thetcutkid

KP, many thanks for your reply too.

So if my sister was to divorce for example, could a court force me out of the house in order to sell it and realise my sister's share so as to divide that up in the divorce settlement ?

I wouldn't ever be in a situation to buy my sister's share out...maybe with the exception of winning a lot of money.

Keep_pedalling

thetcutkid said:

KP, many thanks for your reply too.

So if my sister was to divorce for example, could a court force me out of the house in order to sell it and realise my sister's share so as to divide that up in the divorce settlement ?

I wouldn't ever be in a situation to buy my sister's share out...maybe with the exception of winning a lot of money.

It is unlikely a court would do that but, the value of your sister’s share in the house would be included in a settlement, so she might need to sell to provide a roof over her head if her family home needs to be sold to settle the divorce settlement.

As you could not afford to buy your sister out, would you consider downsizing to something more suitable for a single person with much lower running costs? 

thetcutkid

Keep_pedalling said:

As you could not afford to buy your sister out, would you consider downsizing to something more suitable for a single person with much lower running costs? 

Yes  I would.

I know it would be a massive wrench to leave here, however, I'm also very much aware that half the proceeds of a house sale would be amazing for her and I'd love to see her have the use of it so in some way I'd feel a bit guilty knowing I was stopping that from happening.

As I said in my original post, she is at pains to point out that she doesn't want that but it doesn't change the fact that I do think about it.

Keep_pedalling

thetcutkid said:

Keep_pedalling said:

As you could not afford to buy your sister out, would you consider downsizing to something more suitable for a single person with much lower running costs? 

Yes  I would.

I know it would be a massive wrench to leave here, however, I'm also very much aware that half the proceeds of a house sale would be amazing for her and I'd love to see her have the use of it so in some way I'd feel a bit guilty knowing I was stopping that from happening.

As I said in my original post, she is at pains to point out that she doesn't want that but it doesn't change the fact that I do think about it.

It could good for you too, I have seen too many people who are asset rich and cash poor. Running an expensive large and none too energy efficient house gets move difficult the older you get. 

thetcutkid

Yup, I can't really disagree with that.

Sea_Shell

Although it will be a wrench, maybe it would be a good time for a fresh start?    

You sell, and split the proceeds*.  You buy yourself something with your half, and your sister and family get to enjoy their half.   Maybe their circumstances may change and they really could have used the money!   Maybe they'll need it to support their children, university/house deposit etc.

When the time comes have a look at Right Move and just see what's available in your price range.   You never know, you might see an amazing little place that will be just right for you, moving forwards.

* Even if you find something that is a bit more than your 50% share, you can always come to an agreement to vary that share, say to 60/40.   So you can afford the new place and your sister still gets 40% of the estate.    If your sister was already happy to put her inheritance on the "never, never" then hopefully she'll be open to discussions about a varied cash split.


ETA - This could be a problem for your Mum to accept though.  So maybe don't bring it up.  She maybe has her heart set on you keeping the "family home" and may become upset if she knows it's just going to be sold.   Only you know your Mum.   

p00hsticks

thetcutkid said:

Keep_pedalling said:

As you could not afford to buy your sister out, would you consider downsizing to something more suitable for a single person with much lower running costs? 

I know it would be a massive wrench to leave here,

Bear in mind that you may feel differently once your mother dies - I know someone in a similar situation and after a few months they just felt they needed to move as they found it too upsetting to remain in the property they had shared. (Having said that, I believe the general advice is that if you can avoid having to make big decisions such as moving in the year following the death of a loved one it is best to do so).