Main residence rules?

heavenlywoman

My husband and I are in the process of gifting our 2 daughters a property. They do not live in it and they do not own any other property. It will be gifted with tenants in situ. We anticipate that the tenants will be given notice, the property renovated and then sold with the proceeds going to our daughters. We understand that they would be liable for CGT, if they have never lived in the property.

What we are trying to understand and are not clear on is in order not to be liable for CGT, how long do they need to live there for? Also, as the property will have tenants at the point of transfer to them and does not allow them to live there from day 1, does that automatically exclude them from declaring it as their main residence, are there any rules which effect this so that CGT does not become due? Thank you in anticipation of your help.

silvercar

Principal Private Residence is based on fact. They obviously can’t declare it as their PPR if it is tenanted. Once vacant they would need to move in and stay there for the sufficient time that the revenue accepts that status. Generally evidence would include changing their address to the property with their work/ hmrc/ bank accounts. Registering with a local doctor etc. The revenue won’t give you an indication of whether they accept the PPR status in advance. I’ve seen accountants advise of at least 6 months, if not longer.

CGT is calculated as the gain (selling less buying prices) less so buying and selling costs, less improvement costs. Exemption for the time of PPR and the last 9 months of ownership under current rules.

SDLT_Geek

heavenlywoman said:

My husband and I are in the process of gifting our 2 daughters a property. They do not live in it and they do not own any other property. It will be gifted with tenants in situ. We anticipate that the tenants will be given notice, the property renovated and then sold with the proceeds going to our daughters. We understand that they would be liable for CGT, if they have never lived in the property.

What we are trying to understand and are not clear on is in order not to be liable for CGT, how long do they need to live there for? Also, as the property will have tenants at the point of transfer to them and does not allow them to live there from day 1, does that automatically exclude them from declaring it as their main residence, are there any rules which effect this so that CGT does not become due? Thank you in anticipation of your help.

I wonder if OP has taken account of these points:

1.  OP and her husband H are making a market value disposal of the property for capital gains purposes, so the first lot of CGT to think about is their own CGT?  Has the property gone up in value much since OP and H acquired it?  Have OP and H lived in it as their only or main residence for much of their period of ownership?

2.  The daughters, if they presently have first time buyer status for stamp duty land tax purposes, will lose that, and so if buying their own home in England in the future will have higher SDLT to pay?

3.  The daughters, if they buy another property when still having a share in the property OP and H are gifting, will pay a stamp duty surcharge?  It is presently 3% in England (likely to rise in my view) and higher in Wales and Scotland.

4.  The daughters, given that the plan is to renovate the property and sell it, could be liable to income tax on any profit from their business venture, rather than capital gains tax?

Bookworm105

So you and your husband will be liable for CGT on the property at the point you dispose of it (ie gift it to daughters).
As it is not your main home then obviously you will have CGT to pay yourselves (how much depends on whether you ever lived in it as the marital main home)

Your children will acquire a tenanted property at its then market value. 
It is not their main home, it is the tenants home. In order to claim it as a main home it must be available to be lived in as such, (hence the ability to choose between properties if you own a second home) but it is not available to daughters at point of ownership transfer.
Children therefore liable for CGT from the date of acquisition

If children occupy the property as their main home after tenant eviction then they get relief from that date.
Anything prior to then remains liable.
That said, will it really be their main home? A claim for Private Residence Relief is based on the quality of occupation, not quantity of occupation. HMRC will be informed of the sale, they will know about your disposal to daughters. Sale by daughters a short time after may trigger an enquiry into "quality" since acquiring, doing up, and selling is inconsistent with moving into a new "home" -  the phrase is "permanence, continuity and expectation of continuity". Legal precedents have been set for those terms, in one case the person was given failure of main home claim after 18 months of owning it. If they lose a claim for PRR then the fact they "did up" the property may result in them being liable to income tax, not CGT as they would then be classed as property developers (ie undertaking a trade liable to income tax), not ex landlords selling up an investment after ceasing a rental business and so liable to capital tax .

CG64460 - Private residence relief: only or main residence: meaning of residence: Goodwin v Curtis - HMRC internal manual - GOV.UK (www.gov.uk)

your plan appears to be an excellent way to end up paying two lots of tax plus a shed load of costs for change of ownership. All for the sake of disposing of a property you and husband no longer want anyway.

Sell it yourselves and give the money to daughters, there is no tax on such money gifts.

(and really pedantically: CGT is based on beneficial ownership. not legal ownership. So are daughters going to become the landlords of tenants in real terms? If not, the CGT liability would revert to you anyway as the beneficial owner of a rental business asset that is now being disposed of)

badmemory

If this is a way of avoiding inheritance tax then none of this will work if you are both likely to die within 7 years.  That is if you are even likely to be liable for IHT.  Many think they will be but actually will not.  Or are you talking deprivation of assets.  As in trying to avoid paying for care.  I am not having a go just trying to send out warning signals.  There are some "advisers" who suggest this sort of thing & well some of them seem to have questionable qualifications.

Frankly I would go with bookworm

Sell it yourselves and give the money to daughters, there is no tax on such money gifts.

Keep_pedalling

You are definitely doing this the wrong way round, selling and gifting the proceeds (less your CGT liability) is by far the best option

Brie

Wondering also if the daughters are legally the owners and there's any issues getting the tenants out who goes to court, hires the solicitors etc etc.  Wouldn't they need to be named as the owners?  (I don't know, just asking)

Why wouldn't you get rid of the tenants (legally of course) as you obviously know about renting property and all the stuff that needs to be done to get things done.  Then renovate it if it actually needs that.  And then sell or give it to the kids.  

And just to be sure - do they want to live there?  Together?  Not sure I've ever wanted to live with any of my siblings for more than the length of a holiday since we all left our parents' home.  Can they afford to be home owners???

Bookworm105

Brie said:

Wondering also if the daughters are legally the owners and there's any issues getting the tenants out who goes to court, hires the solicitors etc etc.  Wouldn't they need to be named as the owners?  (I don't know, just asking)

a crucial question 

theoretica

Do your daughters have experience, skills and contacts in property renovation?  Money spent on doing the property up may not be recouped in sale price.  An estate agent might be able to give good advice on whether work would really be worthwhile.

Grumpy_chap

heavenlywoman said:

My husband and I are in the process of gifting our 2 daughters a property. They do not live in it and they do not own any other property. It will be gifted with tenants in situ. We anticipate that the tenants will be given notice, the property renovated and then sold with the proceeds going to our daughters. We understand that they would be liable for CGT, if they have never lived in the property.

What we are trying to understand and are not clear on is in order not to be liable for CGT, how long do they need to live there for? Also, as the property will have tenants at the point of transfer to them and does not allow them to live there from day 1, does that automatically exclude them from declaring it as their main residence, are there any rules which effect this so that CGT does not become due? Thank you in anticipation of your help.

Why not wait until the tenants leave of their own accord, sell, and then gift the proceeds to your daughters?
OR, serve notice yourself, complete the eviction process, sell, and then gift the proceeds to your daughters?

You will be liable for CGT up until the time you dispose of the property.
If the future progresses as you describe is the intent, then your daughters will never live in the property and never gain any CGT relief.  If they do live in the property (as PPR), then it is a pro-rata from the time owned that can accrue eligibility for CGT relief.

By gifting the property to your daughters, they will lose any First Time Buyer status, so this will affect future stamp duty they will pay when they pay a house to live in.
Your daughters will also be assessed as having capital in the event that they claim any means-tested benefits.  If you gift then the proceeds from the sale of the house, they can at least live on the gifted amount.  They cannot live off the value of a property with a tenant in situ.

Your daughters will incur income tax on the nett income received from the tenants after you have gifted them the property until the tenants vacate the property.  This may be at a higher income tax band than you suffer.

Why renovate the property and then sell?  It will likely cost more to renovate than value added.  Simply sell once the tenant has vacated the property.

theartfullodger

Depends on CGT rules when sold - not now.  Expecting CGT rules and rates to get tougher.  So if you can tell us rates when they sell we'll see what we can do.