Buying half share of house

V2001

In this example pls answer:

2 brothers live in a house together as tenants in common holding 50 50 shares each. House is worth 500k.
If one brother buys the other share out for 250k and owns it outright,  do they have to apply a 15% discount for the share. Or is that only done if it was upon death for IHT.

JGB1955

AIUI there is nothing suggesting the 15% discount is anything more than a 'suggestion'.

V2001

Ok as I was advised a 15% discount needs to apply because of the difficulty in selling because someone already lives in the house, and it applies for iht.

elsien

Advised by who? The person owning the other half? 

V2001

elsien said:

Advised by who? The person owning the other half? 

Lol no, A tax accountant . They said you need to discount the share by 15% and was referring to something about IHT. They said it shudnt be half of the whole value, but I didn't understand it fully.

Bookworm105

elsien said:

Advised by who? The person owning the other half? 

as the OP reads like an exam question he can look up in his textbook I am not going to answer it directly, but in response to your query it is the approach adopted by the VOA (HMRC), and supported by actual case law, when looking at the value of a half share of a property in the event of the death of one of the owners:

"In England, Wales and Northern Ireland as a matter of practice the nature of jointly owned property results in the discounting of the open market value of land or buildings. The District Valuer (DV) (IHTM23002) will report the value of the share having allowed for this ..."
IHTM15072 - Valuation of joint property: discounts for joint ownership - HMRC internal manual - GOV.UK (www.gov.uk)
 
The principle being that where people live in the same property as joint owners and one of them dies, but the other continues to live there, then the deceased person's "half share" cannot be worth the mathematical 50% of total value because it cannot be easily sold as the other person remains living there and could delay the sale of the whole. Therefore the part share must be worth less than 50% of the whole

in recognition of that scenario, a "discount" factor of 10 or 15% is applied depending on who the acquirer is, who is still alive and who is in occupation. 
it is a rather complex area of valuation and inheritance tax with CGT implications as well 
IHTM15071 - Valuation of joint property: valuation - HMRC internal manual - GOV.UK (www.gov.uk)

Inheritance Tax Manual - Section 18: undivided shares - Guidance - GOV.UK (www.gov.uk)

A discount may also be applied to other non property assets, but that is for a different discussion 

V2001

But in this case where no one has died does the 15% discount still apply? Or it only applies upon death 

sheramber

Surely,the brothers can agree any amount for the transfer of the share.

More_complicated_than_that

V2001 said:

In this example pls answer:

2 brothers live in a house together as tenants in common holding 50 50 shares each. House is worth 500k.
If one brother buys the other share out for 250k and owns it outright,  do they have to apply a 15% discount for the share. Or is that only done if it was upon death for IHT.

Some thoughts:

1. The brothers can choose whatever price they like, tax doesn't tell you what cash to pay. 

2. The market value of something for capital gains tax purposes (that are not shares) is basically the price that some random stranger would be prepared to pay to own whatever it is actually being sold. I'd pay way less than half the market value of the whole house (with the buying brother in residence and not paying anything to keep living there).  I suspect all sensible random strangers would do so.  Whether this would be a 10%, 15%, 20% or whatever discount would be based on whatever the facts are.  For these purposes, you'd normally ignore what the buying brother would be prepared to pay in reality because of his special circumstances (since someone in his unique position would just pay £0.01 more than the next highest bid).

3. The market value for IHT purposes is, for practical purposes, the same as for CGT.  But it is used in different ways for the buying and selling brothers.  

4. For SDLT (and probably the same for equivalent taxes in Wales and Scotland, but I don't know), the price paid is relevant, not the market value.

For the selling brother, CGT may not be an issue (e.g. because of PPR) but if it is, the market value of the half being sold will be used to calculate the gain (with the 15% or whatever discount) rather than the price paid.  For the buying brother, the market value (with whatever discount) is added to his base cost (and not the price paid).

It's a bit of a non-issue for IHT if the buying brother pays the full 50% price.  It would only be an issue if he paid quite a lot over the odds (basically if he pays (i) market value of the whole house, (ii) less market value (e.g. reduced by 15%) of his half share.  Even then it would be a PET (unless another exemption applies).

If the selling brother got anything less than the market value (e.g. less a 15% discount) then there would be PET (unless another exemption applies).  If the selling brother gets more, there is no IHT issue for the selling brother.