Building work on inherited house / split inheritance with sister

TamVilla80

Hi. Everyone is so helpful on here that I'm picking your brains again!

My husband has inherited his late Father's house, to be split equally with his sister.

We would like to move into the house, but only after some building work has been done (extension for new kitchen, new bathroom, etc) We are still waiting for Probate...14 weeks and counting... but hoping to have it any day now. We have the funds to start the build now, and a builder that can do it, but are we ok to start before the probate is granted? 

Secondly, can anyone confirm the situation for Capital Gains Tax? I understand the value is taken from the house value at time of death. If we get the works done and the house increases in value, we are not charged based on the new value of the house?

We want to continue to live in our house until works are done, then sell ours and use the funds from that to pay his sister her half. For arguements sake, the house is worth £200k, they have an equal 50/50 share, so we owe her £100k. She is happy to wait for her money until we have sold our house to pay this off (luckily they have a very good relationship and all is good)

Can I just check what we are missing and any unexpected costs / tax bills that may occur, any advice in best way to do this? 

sheramber

Is this there enough money in the estate to cover any bills or debts due?

TamVilla80

Yes, no major debts (just gas / electric bills) and plenty of cash in the accounts

Keep_pedalling

TamVilla80 said:

Yes, no major debts (just gas / electric bills) and plenty of cash in the accounts

Is there sufficient cash to give your sister her full share of the estate? Even if there is not it might be worth her taking that so you have a smaller percentage to buy out and reduce stamp duty. 

Really you sort out the estate distribution before starting any work on the house and you should not be using estate assets to pay for it. I know your sister seems OK with this but there are risks involved and she may find herself with a CGT liability with the uplift in value. 

TamVilla80

We aren't using estate funds to pay for the work, it's our money that will pay for it (hence we can start the work now before probate is cleared and my father in law's funds are released) 

This is where I'm unclear, shouldn't the CGT be worked out on the value of the house on the date of death, which we have as £200k. There is a further £50k cash, so are you saying give her all the cash and then only £75k when we sell? Do we still pay the stamp duty even though we are inheriting the house? I understand that if we do, we can claim this back if we move in and sell our old home within 2 years and the house becomes our main residence? 

poppystar

CGT is based on any uplift in value from death to date of sale. At death only IHT could be due. You can offset major improvements against that uplift in value along with legal fees in calculating CGT liability. So what you might end up doing is creating a CGT bill for your sister when you effectively buy her half. It would be much cleaner if you could buy her out now or give her her half of the probate value from other assets. None of the costs of the improvements or the ongoing running costs of the property, if they are over and above the cost of the property being empty, should fall on the estate. You really need a clear agreement that protects your sister if you go ahead with works pre probate. She should not be, or risk being, in a worse situation than if the property had been marketed on the open market and sold once probate obtained - because extra costs have fallen on the estate, because the value is lower than market value or because she is unable to invest her half of the inheritance while she is waiting.  

TamVilla80

Thank you. If we paid eg £45k to get the work done, the house was then valued at only £230k (from the £200k probate value) would we then give her half of the £185k, so then £92.5k but then just give her the £7.5k separately?

She is happy to accept £100k for the value of the house and to wait for us to do the work. Could we just get a document signed by both parties to confirm this?

Keep_pedalling

Actually there will be no stamp duty payable as the purchase will be below £250k 

As an example of how CGT could effect this, if for example you spent £50k on up dating it and it increased the value by the same amount then your sibling will have a gain of £25k. Some of this can be offset by the upgrade costs but not on everything you spend can be claimed. For example if the house had no central heating and you installed it, then that expense can be claimed, but replacing an existing boiler and radiators would be classed as maintenance and you could not claim that.

I am sure there is a way round this, perhaps transferring the property into your name but with your sibling having a charged registered against the amount owed to her. This would in effect be a loan.

TamVilla80

Keep_pedalling said:

Actually there will be no stamp duty payable as the purchase will be below £250k 

As an example of how CGT could effect this, if for example you spent £50k on up dating it and it increased the value by the same amount then your sibling will have a gain of £25k. Some of this can be offset by the upgrade costs but not on everything you spend can be claimed. For example if the house had no central heating and you installed it, then that expense can be claimed, but replacing an existing boiler and radiators would be classed as maintenance and you could not claim that.

I am sure there is a way round this, perhaps transferring the property into your name but with your sibling having a charged registered against the amount owed to her. This would in effect be a loan.

Would we not be liable for 3% stamp duty if this is classed as a second home but still under £250k? I understand we could then get this refunded when we move?

'If you’re replacing your main residence

You will not pay the extra 3% SDLT if the property you’re buying is replacing your main residence and that has already been sold.

If you have not sold your main residence on the day you complete your new purchase you’ll have to pay higher rates. This is because you own 2 properties.

You can apply for a refund if you sell your previous main home within 36 months'

The improvements are dismantling an old conservatory for building an extension to have a new kitchen in (old kitchen becoming a study / snug) new bathroom, new fuseboard and some electrics upgraded, radiators replaced throughout. So guess this all can't be offset?

Will look further into the charge registration, this could be suitable...

msb1234

If the housing market rises in the time between your father dying and you being in a position to give your sister half the value, then she may well have lost out on the chance of a higher amount. Eg, value at death £200k, value 12 months later £230k - she loses out on £15k while you benefit by £30k. Even if the value of the property doesn’t increase, shes losing out on interest on £100k, which over a year is not insignificant. You spending money on the house whilst renovating is irrelevant. 

TamVilla80

And if the housing market goes down and the house is only worth £180k for example, we would still give her the £100k we have agreed, so we would be missing out then. 
It's not the financial side of it that is the question, my husband and his sister are in full agreement with their plans, the question we have is what legally we can / need to do