CGT, Private Residence Relief and Letting Relief

TheGreenFrog

My three daughters inherited a property in 2013 when they were minors (they own in equal shares).  It was let out for 5 years, following which one of them (Daughter A) has lived in it as her main residence (so approx 5 out of 10 years), and the other two (Daughters B and C) have spent a small amount of time living there as main residence (about 1 year each).  Daughter A is now going to dispose of her entire interest in the property to Daughter C and Daughter B is going to dispose of a small portion of her interest to Daughter C.  A red book valuation of the property is being obtained and will show a gain. 

My understanding is that Daughter A will get private residence relief on her gain equivalent to the proportion of time she has lived there versus period of ownership (so roughly 50%).  Daughter B will also get relief on a similar basis but I am not sure whether she will be able to add 18 months on (as she has not lived in the property during the last 18 months, whereas Daughter A has) - in other words is the relief 1/10 or 2.5/10?

I am also not sure about the application of letting relief.  It seems to me that it is applicable and the result is that:  Daughter A will be entitled to letting relief at the lower of (A) the amount of her PRR; (b) £40k; and (c) amount of gain attributable to the letting.  Assuming letting and residence are equal and it seems to me that there will be no chargeable gain as the gain attributable to the letting period will be less than £40k (it may be slightly more for entire property but less than £40k for Daughter A's share).  In fact her residence period may be slightly greater than letting period (eg 5 years one month of residence and 5 years of  letting) in which case there will still be no CGT payable.

For Daughter B, letting relief will also be available but restricted to an amount equivalent to her PRR (as that will be less than £40k and less than the gain attributable to the letting period).

Will be very grateful for any pointers as to whether my thinking is correct.

[Deleted User]

Can’t reply fully just yet but:

a) 9 months can be added on if main residence at some point, no longer 18.

b) Letting relief no longer applies from 6th April 2020.

TheGreenFrog

purdyoaten2 said:

Can’t reply fully just yet but:

a) 9 months can be added on if main residence at some point, no longer 18.

b) Letting relief no longer applies from 6th April 2020.

Thanks - the dangers of not checking the date of tax articles!  

Jeremy535897

You also need to look at the valuations you get. Whilst each daughter's base cost is one third of the total value of the property in 2013 (assuming that they own all of it between them and there was no trust), the deemed proceeds on the inter-sibling sales will be based on the values of the parts disposed of, which are 33% at most. The value of one third of a jointly owned house will be less than one third of the value of the whole house.

it may also be worth considering https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg71870

For more detail on main residence relief, this is a useful starting point:
https://www.gov.uk/government/publications/private-residence-relief-hs283-self-assessment-helpsheet/hs283-private-residence-relief-2022

TheGreenFrog

Jeremy535897 said:

You also need to look at the valuations you get. Whilst each daughter's base cost is one third of the total value of the property in 2013 (assuming that they own all of it between them and there was no trust), the deemed proceeds on the inter-sibling sales will be based on the values of the parts disposed of, which are 33% at most. The value of one third of a jointly owned house will be less than one third of the value of the whole house.

An interesting point; I wonder whether the red book valuation will take that into account or, if it does not, whether HMRC are likely to dispute an allocation by reference to the full value of the property.

TheGreenFrog

I have found reference on internet to 10% discount being common but that HMRC accept 15% discount where co-owners of residential property have the right to live there (referring to 1982 Lands Tribunal case of Wight).

And also the following - which although in the contect of IHT is hopefully valid for CGT:

https://www.gov.uk/guidance/inheritance-tax-manual/section-18-undivided-shares

silvercar

A complication may be that minors can't own property, so while the daughters were minors it would have been held in trust for them. That being the case the length of time they individually owned the property may be different.

Jeremy535897

silvercar said:

A complication may be that minors can't own property, so while the daughters were minors it would have been held in trust for them. That being the case the length of time they individually owned the property may be different.

Yes, I questioned whether there was a trust, although it may simply be that a parent held the property as nominee for the children.

silvercar

Jeremy535897 said:

silvercar said:

A complication may be that minors can't own property, so while the daughters were minors it would have been held in trust for them. That being the case the length of time they individually owned the property may be different.

Yes, I questioned whether there was a trust, although it may simply be that a parent held the property as nominee for the children.

Can you live in the property as you PPR when it is held in trust or by parent? I mean, obviously you can physically live in it; but for tax purposes would it count that it was your PPR if the time you lived in it your were a minor.  And would the trust need to be dissolved and it transferred to your name before you could obtain PPR relief.

Jeremy535897

silvercar said:

Jeremy535897 said:

silvercar said:

A complication may be that minors can't own property, so while the daughters were minors it would have been held in trust for them. That being the case the length of time they individually owned the property may be different.

Yes, I questioned whether there was a trust, although it may simply be that a parent held the property as nominee for the children.

Can you live in the property as you PPR when it is held in trust or by parent? I mean, obviously you can physically live in it; but for tax purposes would it count that it was your PPR if the time you lived in it your were a minor.  And would the trust need to be dissolved and it transferred to your name before you could obtain PPR relief.

It depends on the trust. If it is a simple nominee (bare trust) arrangement, the child will be treated as owning it outright for all tax purposes, including the period it is their main residence.

TheGreenFrog

Jeremy535897 said:

It depends on the trust. If it is a simple nominee (bare trust) arrangement, the child will be treated as owning it outright for all tax purposes, including the period it is their main residence.

In this case the legal (i.e. registered) owner held as bare trustee for the beneficial owners (i.e. the minors).