Capital Gains Tax on house we're about to exchange on

MartinW6

Hi all,

Having got some brilliant advise from various people on this forum, we're about to sell a house (there was a restriction in the title deeds that was causing a delay which has now been resolved).  However, I had a few queries regarding CGT.

A quick summary...

• Mum and dad bought the property back in 1981 for around £85k.
• My father pass in 2014 and his half of the property was put into trust for me.  The value of the property at the time was approximately £600k.
• Three years ago, we felt mum was no longer able to live alone and so we had her move in with my wife and I.  So it's been empty since.
• The house is being sold for £585k.  Yes, lower than perhaps it should have been but circumstances meant we had to accept a lower offer (partly because that was as much as the buyer could afford).

My question is, do I pay CGT on the increase in the house's value from when mum and dad first bought it (£85k) or from when it went into trust/I inherited my share in 2014 (£600k)?

I believe it's the latter, but there's a big difference and I don't want to assume anything!  I also think that, as it's not been mum's primary residence, that she may also be liable for CGT?

Note: I've already arranged to see an accountant so this is all done properly, but wanted some general advice.

Thank you in advance.

Martin.

Jeremy535897

General advice is as follows. The base cost of the half of the property belonging to your father is the value of that share at the date of his death. There should be a figure in his probate, although HMRC are only bound by this if there was inheritance tax payable on his death. Whether that is your base cost, or a trust's base cost, depends on what sort of trust it was. There could be further complications if the share was appointed out of the trust to you.

Your mother will have a gross capital gain (ignoring costs and any improvements) of £250,000. If it was her main residence from 1981 to 2020, then about 20 years of the overall ownership of 22 years will be exempt (the period she occupied it as her main residence plus the last 9 months of ownership). That leaves about £22,750 taxable, from which she can deduct her annual exemption (£12,300 if contracts are exchanged by 5 April 2023, £6,000 if exchange takes place the following year) assuming no other gains. She will need to report and pay the tax within 60 days of completion, and also complete a self assessment tax return, unless she has no other reason to complete one, and the tax paid on the online form turns out to be correct. See:
https://www.gov.uk/report-and-pay-your-capital-gains-tax/if-you-sold-a-property-in-the-uk-on-or-after-6-april-2020

There is an anomaly that if the house is sold by 5 April 2023, and she completes a self assessment tax return (showing all her income and gains as usual) for 2022/23 within 60 days of completion, she need not do the online reporting, and has until 31 January 2024 to pay the tax.

MartinW6

@Jeremy535897 the grant of probate states that the value of the estate (which I believe is referring solely to the house) was £328k.  Do I pay CGT on that figure, or the gain in value of my late father's estate from April 2014 (when it was £328k) to the date of completion in the next few weeks (£585k/2)?

I realise that HMRC might question why the house was sold at a lower price - I just really want to grasp what I pay CGT on.  The price when I inherited it, or the difference in price between inheritance and now.

Jeremy535897

The base cost of the half of your father's share is the value of the share at the date of his death. Why would you pay capital gains tax now on that figure? You, or the trust, whichever owns it, has a capital loss, as it appears that the base cost of that share exceeds the share of sale proceeds attributable to the share, and you can also claim your share of any expenses of sale, and any qualifying improvements you have made since inheriting it. As I said earlier, if the property has been in and out of a trust, the situation will be more complex.

I have to say that I am very doubtful about the values. You are suggesting that a house has fallen in value from £656,000 in 2014 to £585,000 in 2023, and that your father had no assets in his name other than the house. I suppose all the other assets could have been in joint names, but it seems much more likely that there are other assets included in the figure of £328,000, as well as his share of the house.

MartinW6

Mum and dad had savings and shares, so perhaps his half of those assets were included in the estate valuation?  Taking those out of the equation, the value directly related to the house would be closer to £275k (that's ballpark).

We've also undersold the property.  When we had estate agents value it back in August, they were coming in at an average listing price of £700k.  Of course, a house is only worth what someone is willing to pay for it and we only had two genuine offers (the other being lower than 585k).  In the years since my father passed, there's been very little upkeep of the house.  Not to say it's in bad shape - it's actually a great construction. 

Anyway, I'm not out to avoid CGT - I have to pay what HMRC say.

My feeling is, and it's just a feeling, is that having sold it so low that there'll be little CGT to pay (if any).  Whether HMRC agree is of course an entirely different kettle of fish!

Jeremy535897

That may well be the case. I think it is very important that you establish two things:

• what was the probate value assigned to your father's share of the property? 
• what is the nature of the trust? Is it a bare trust, so you are the beneficial owner, or is it some other sort of trust, and if it is, does the trust still own the share of the property, or has it been appointed out to you?

Capital gains tax is charged on capital gains, calculated as sale proceeds (less costs of sale), less acquisition cost (plus costs of acquisition) (and any qualifying improvements to the asset). When you inherit something from someone's estate, your acquisition cost is the market value of the asset at the time of death (probate value). The capital gain up to death disappears, as it would be unfair to subject an asset to both capital gains tax and inheritance tax when someone dies. If the estate pays no inheritance tax, HMRC don't spend any time looking at the probate values of the various assets, as there is nothing in it for them. They can therefore dispute them when the asset is sold.

There are various sorts of trust, with different tax regimes, and a will trust wound up within two years of death may effectively be ignored, depending on the precise arrangements. The rules are different in Scotland as well. You can see a brief guide here:
https://www.gov.uk/government/publications/trusts-and-capital-gains-tax-hs294-self-assessment-helpsheet/hs294-trusts-and-capital-gains-tax-2020

Keep_pedalling

Did your father’s will give you mother the right to remain in the house for life? If so it is likely that his will created an IPDI (Immediate post-death interest) trust, which would mean your mother would remain the beneficial owner of the whole house and it would not pass to you until her death or the trust was wound up. This would mean all the house sits in your mothers estate, and none of of his NRB will have been used up.

If this is the case you are yet to take ownership of his share of the house and will have no CGT liability.

MartinW6

Hi all,

Well, good news, the house sold on the 23rd of March.  The accountants I hoped would be able to assist have come back and said they're struggling to calculate CGT due to the trust that was put into place.  However, they did suggest an account who specialises in CGT/trusts whom I'm now liaising with.  However, I'd be interested to know people's thoughts on what the potential CGT might be.  Some pertinent facts...

• 1982 - my mother and father bought 38 High Street.  I don't have the exact figure, but believe it was around £85k.

• April 2014, my father passed.  My half of the beneficial interest was put into a Lifetime Interest trust, @ke@Keep_pedalling which I believe created an IPDI (although I cannot say that with any authority).

• At probate, my father's 50% share of the house was valued at £275k, so £550k overall.  WSL of London, who created the will which incorporates the trust, have advised me that due to the nature of the trust, I have no CGT liability.  Whilst I would like to believe that, I would prefer to know for certain.

• June 2020, my mother came to live with us.  The house was rented from November 2020 to November 2022.  Mum paid income tax on the property via Self-Assessment.

• March 2023, my mother and I sold the house for £585k.

My main concern is that my mother and/or I are going to be hit with a massive CGT bill.  However, I suspect that I'm probably "catastrophising" and that whilst we may well be liable for CGT, the idea that we could be looking at a 100k bill is bonkers.

Thanks in advance for any further input.

Jeremy535897

Presumably the trust, rather than you, sold half the house? If the trust gave your mother a life interest (this is crucial), and it remained her main residence until June 2020, then there are two calculations to make:

• on her half, base cost £42,500, sale proceeds after costs say £290,000, gain £247,500, exempt about 39 out of 41 years (actual occupation as main residence plus last 9 months before sale), chargeable gain about £12,000 (within annual exemption)
• on the trust's half, base cost £275,000, sale proceeds £290,000, gain about £15,000, exempt about 7 out of 9 years, chargeable gain about £3,000 (normally within annual exemption)

See https://www.gov.uk/government/publications/trusts-and-capital-gains-tax-hs294-self-assessment-helpsheet/hs294-trusts-and-capital-gains-tax-2020

xylophone

I think that you (  or the chartered accountant advising) must examine the precise terms of your father's will to determine exactly what kind of Trust was created.

https://wards.uk.com/services-for-you/trust-creation-management/trusts-guides/life-interests-rights-occupation/

Grumpy_chap

Is there any CGT on the mother's half?

I understand that there are exemption in the case of going to care etc. that the PPR remains the family home.  Whether care is a hospital, nursing home or family member may not be material.

Asking as a question as I am not knowledgeable on the details here, but if there is an exemption available would not want the OP to declare CGT unnecessarily.