CGT on sale of 2nd property and timing

Woyson

Having read a good bit on the subject of CGT, I am looking for some help or clarification. I have a cousin in a bit of a tizzy and asking for my opinion on a CGT situation. They are a PAYE basic rate taxpayer not familiar with these things and they want to keep themselves right, hence the tizzy. Having listened and asked a bunch of questions, this is the situation as I understand it. About 18 years ago a relative of theirs was havering about buying their council flat. Being in a position back then to do so, they offered to help and loan them £12,000 to help buy it. There was an agreement at the time or just after that, which gave their relative the option to either repay the loan within a given number of years or if they wished, to not repay the loan and instead to gift the flat to my cousin, whilst at the same time their relative would retain a life rent. About 14 years ago their relative chose the gift/life rent option and the property duly transferred to my cousin. Their relative passed away last year and they are now looking to sell the property and so they want to plan for the CGT that they (and I) believe they will have to pay.

Material facts which I understand to be key. They have their own property. They report their relative died with about £5,000 to their name in the way of an insurance policy, savings and not much more. They estimate the property (a small 1 bed flat in a local authority block that is 95% still Council owned) had a value of £35,000 when it transferred to them. Today their feedback is it has a value of £75,000. This is my unprofessional understanding of how things would work, but it goes without saying that I want my cousin to get good advice, hence I am asking here. As their relative died with minimal funds and the flat value was/is only £75K, my understanding is there will not be any gift with reservation of benefit issues due or for them to deal with, albeit it would be somewhat after the event (they did not handle the estate). Assuming that is the case, does it all just boil down to a relatively straightforward case of CGT due on the sale of a gifted 2nd Property? So using their rough numbers, Sale Price (£75k), less value declared at time of gifting (£35k), less total cost to sell (£2.5k), less CGT allowance (£12.3k) = £25,200 CGT to pay tax on. Some of which will be at 18% and some at 28% if they go over the basic rate threshold. Assuming that I am on the right track, I understand that when they sell, they are required to report the sale to HMRC within 30 days of the sale? All feedback is welcome, thank you very much.

Jeremy535897

If there was a trust created by the relative that gave a life interest in the property in favour of that relative:

• there is no gift with reservation as the property remained in the relative's estate for inheritance tax purposes anyway (well within the £325,000 nil rate band)
• for capital gains tax purposes, the base cost to the remainderman (cousin) should be the value at the date of cousin's death, as there should be a tax free uplift on death

 The documentation is key to this analysis, though, and professional advice should be sought. If there is a capital gain on which tax is payable, see:

https://www.gov.uk/capital-gains-tax/report-and-pay-capital-gains-tax

Woyson

Jeremy535897 said:

If there was a trust created by the relative that gave a life interest in the property in favour of that relative:

• there is no gift with reservation as the property remained in the relative's estate for inheritance tax purposes anyway (well within the £325,000 nil rate band)
• for capital gains tax purposes, the base cost to the remainderman (cousin) should be the value at the date of cousin's death, as there should be a tax free uplift on death

 The documentation is key to this analysis, though, and professional advice should be sought. If there is a capital gain on which tax is payable, see: ********************************

Thanks for the feedback and the link, which was what I used for reference initially, thanks. From what I have now been sent, there was no "Trust" as such, just a clear, signed "Minute of Agreement" that outlines the loan, that the loan was secured against the property, that there was the option to repay the loan after 3 years had elapsed or option b) was to not repay the loan, transfer title and live rent free for the remainder of their days. Except in the case of marriage, where were they to marry and their partner survive them, my cousin would be entitled to sell the flat. As mentioned, title transferred to my Cousin about 14 years ago, which is what I took to be the date of ownership that they need to be declare from a CGT perspective. From what you say, may it be the case that ownership only actually happened at date of death when the life rent clause ceased to exist? or is that only the case where there is a trust? Thank you.

Jeremy535897

I would suggest your cousin seeks advice on the precise consequences of the "minute of agreement". If it creates a life interest trust, the consequences are as I outlined. If not, the base cost is the value at the date the property was transferred.

Woyson

Jeremy535897 said:

I would suggest your cousin seeks advice on the precise consequences of the "minute of agreement". If it creates a life interest trust, the consequences are as I outlined. If not, the base cost is the value at the date the property was transferred.

I should have said that they are in Scotland and so Scottish law is applicable, with the "minute of agreement" signed by a solicitor and both parties. From further reading we don't think this would be viewed as a trust as there are no trustees or references to a trust. I do agree however that they really need to seek advice, but in doing some digging we found some more info on the government Scottish CGT website that indicates it's possibly the value of the property at death that needs declared. 

I cannot post links, but you will find the brief info if you Google CG31301 - Death and Personal Representatives: Non-trust life interests: Death: non-trust life interests: Scottish proper liferents. There it explains the difference in Scotland between a proper liferent (no trustees and liferent noted in the burdens section of a title sheet with land registry on deeds) and an improper liferent (trustees and not registered with land registry). In this case what they have/had appears to be a proper liferent as the liferent was registered in the deeds on the land registry. On the gov website it goes on to say .. "Where property in Scotland passes to a person for life under a will, and there is no suggestion that it is to be held by trustees, he has a proper liferent. A proper liferent does not make the relevant property settled property. IHTA84/S43 (4)(c) provides that it is settled property for IHT purposes. TCGA does not go so far, but S63 provides that the person entitled to possession on the death of a proper liferenter shall be deemed to have acquired all the assets forming part of the property at their market value at death".

The only point there is that the property was not part of a will as such, but it did pass to them fully (liferent ended allowing them to now sell) at date of death. Thanks.

Jeremy535897

I don't know anything about Scottish law, but the intent of the UK capital gains tax legislation is to give a capital gains tax free uplift on death in cases where the deceased beneficially owned, or had a right to the income from, the property, and entitlement to occupy rent free can, in certain circumstances, count as a right to income. It looks as if there should be a capital gains tax free uplift on the liferenter as per the CGT manual, but the devil is in the detail of the documentation.

Woyson

Jeremy535897 said:

I don't know anything about Scottish law, but the intent of the UK capital gains tax legislation is to give a capital gains tax free uplift on death in cases where the deceased beneficially owned, or had a right to the income from, the property, and entitlement to occupy rent free can, in certain circumstances, count as a right to income. It looks as if there should be a capital gains tax free uplift on the liferenter as per the CGT manual, but the devil is in the detail of the documentation.

Thanks for the reply again. I have now seen the prior property title deeds extract (now updated to remove liferenter), which mirrored the wording of the Minute of Agreement regards the liferenter. I am also advised that there was no written will, just a clear verbal expression of wishes of what to do, given by the liferenter to their two children who were the two beneficiaries. There was no probate and the small amount of estate money that remained after the funeral, then passed to the grandchildren (a few hundred pounds each).

This then likely leaves my cousin still in the position above, where they are either due £0 in CGT if date of death is used, due to the property losing value and the costs to sell, or approx. £4,000 in CGT if change of title date is used. This leaves only one question for me and it relates to their reporting the sale. If the advice they get is that date of death is the value to be used, is there any requirement for them to report the sale to HMRC? From what I can see there is a 30 day requirement to report sales where a CGT is payable, but no such requirement where no CGT is due. Given that they are straight PAYE with no reason to self assess, is there still a reporting requirement at some point? I did look but all references seemed to relate to no gains due sales not having the 30 day requirement but it was unclear if there was still a requirement for folk who don't typically do self assessment? If nothing else, this has been a very interesting exercise. Thanks.

Jeremy535897

You do not need to use the 30 day system to report a sale of residential property on which no tax is due. However, you do have to complete a self assessment tax return when you have sold chargeable assets for more than £49,200 (4 times the annual exemption) in a tax year, even if there is no tax (it would make sense to do it, even if not required to, if there is a loss to claim). See: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1003753/SA108-Notes-2021_English.pdf