Capital Gains Tax on sale of parents property

bakkesukuk

Hi.

Brief summary

Property held as Tenants in Common
On first death, 50% to go into trust with executors as surviving parent and 2 (out of 4) children
Surviving parent has right to live in property till death - then all 4 children to receive equal share of estate
Mother died Feb 21 - property valued at £280k; Mother's probate value therefore £140, she had no other assets
Father died August 22 - property valued at £330k; Father's probate value propetry value recorded as £165k; plus a few £k in a bank account
On both probates, IHT 205 completed - no IHT to pay, with significant headroom against the thresholds

Both valutions were "done" by one of the beneficiaries who is a chartered surveyor, but we now think the figures may have been too low


Assumptions

On valuation for sale 2 Estate Agents have suggested £350k; 2 others have suggested £425k. The executors should really look to maxmise the estate, but if the higher sale price is achieved this then would introduce signifcant Capital Gains Tax - OR so we think.

Questions 


1. We are aware of the potential use of Deed of Variation and / or Deed of Appropriation. But there is no point is doing the Variation unless then you appropriate which kicks in the CGT Allowances. So the 4 beneficiaries can vary to 4 spouses, meaning 8 CGT allowances can be brought into play by appropriation. Is this understanding correct ?

2. There is some "chatter" that because we have used IHT205, HMRC are "not aware" of either estate. So during conveyancing you merely submit the actual sale price, HMRC will then judge that first against IHT for both estates and, as the headroom on both will cover that, there is no CGT position. Can anyone confirm this OR explain the timeline of events / decision points from a sale price being submitted during conveyancing ?

3. Assuming CGT becomes due, we have been working on a simple equation. Assuming sale price of £400k. Mother estate is half £400k = £200k minus £140k, with £60k subject to CGT rules. Father estate is £200k minus £165k, with £35k subject to CGT rules. Is this right ?

4. We have had the following advice :

As your mother’s share was left into trust for the benefit of your father and he continued to live there as his main private residence, there should be an uplift on the value of your mother’s share to the value at the date your father passed away (with reference to a para on gov.uk "If a life tenant or other person with a qualifying interest in possession dies and the property continues to be settled property or a beneficiary becomes absolutely entitled to the property, the trustees are deemed to have disposed of it and reacquired it at market value"). 

I read this as the "value" of the property against Mother's estate is no longer treated as £140k, but is now treated as £165k (eg the uplift) - eg half the value assumed at father's death. Is this an accurate interpretation ?

And finally, any other considerations, advice or potential pitfalls ??

Many thanks, Mike

Jeremy535897

If father had a life interest in the property (not necessarily quite the same thing as a right to live there), then mother's estate was fully exempt from inheritance tax, as everything passed to father for inheritance tax, and father's estate has the benefit of up to £1 million nil rate bands, so clearly no value would have been agreed for inheritance tax. What that means is that HMRC can challenge any values at both dates of death.

If father had a life interest in the property for inheritance tax purposes, the whole property was treated as in his estate on death, so is uplifted to market value at that date. No discount is applied even though technically he owns two halves of the property (one in the trust and one personally, because of the related property rules). The position is more complex for capital gains tax, and there is a risk that the base cost of the property is equal to two half shares, which would be worth at least 10% less than the value of the whole. I have no experience of whether HMRC can argue this point in these circumstances.

Normally I would see no purpose in the complexity of a deed of variation, as these are only fully effective for inheritance tax purposes. Each beneficiary could simply give half of their share of the property to their respective spouses. As you say, the property has to be appropriated to the legatees to achieve multiple annual exemptions, and so long as there is sufficient time before a sale, no seller has been identified, and the property has not actually been put on the market, HMRC are unlikely to be able to challenge the gifts, but if the timetable is more tight than this, perhaps a deed of variation might slightly improve the chances of success (but expert advice should be taken).

I assume that the will was made in the way it was to prevent half the house being part of father's assets in assessing whether he qualified for state assistance on possible future care fees?

bakkesukuk

Jeremy,

Thanks. To answer your question - The will was made in 2006 when there was less noise about care issues and fees. No one can remember being included in conversations about the purpose of the will. 

The wills, on the death of the first, set up a Trust which gave the survivor the right during their lifetime to reside in and occupy the property.

Mike

Jeremy535897

Was the value of the trust included in father's estate when valuing his estate for inheritance tax purposes?

Keep_pedalling

One of the reasons for doing this back in 2006 was the lack of the transferable NRB which only came in the following year. 

Jeremy535897

Keep_pedalling said:

One of the reasons for doing this back in 2006 was the lack of the transferable NRB which only came in the following year. 

But if father had a life interest, mother's estate was exempt, and her NRB was not used. That is why I keep questioning whether father actually had a life interest. A right to occupy may not be the same thing. If there isn't a life interest, there may be no capital gains tax uplift.

silvercar

Is it at all likely that a property valued at £330k in August 2022 could be valued at £425k in November 2022? One or both those valuations is wrong.

[Deleted User]

silvercar said:

Is it at all likely that a property valued at £330k in August 2022 could be valued at £425k in November 2022? One or both those valuations is wrong.

Two agents valued it at £350k and two at £425k - quite the disparity!