CGT on a Property that was gifted to siblings 25 years ago and Mother lived in rent free leasehold

poseidon1

I can only repeat that none of us have the necessary background information on all aspects of the so called planning executed by the deceased in 2001, to offer a sufficiently informed view of the subsequent CGT /IHT implications flowing therefrom.

What I can say, is the lease creation itself had to involve a third party 'nominee' ( possibly the original advising solicitor), since under the common law rule stated in Rye v Rye ( 1962) a Freeholder cannot carve out a lease for their own benefit without an intermediary.

As such, what occured in 2001 appears ( on the surface ) to be an attempt at a lease carve out scheme along the lines of the Ingram v IRC ( 1999) case as per HMRC technical briefing below -

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm44100

The only saving grace here is this lease carve out was implemented after 1999 so at least pre-owned assets income tax charges do not appear to be in point, which would certainly add insult to injury to the complex issues already faced by the OP's family.

Can only repeat, the family requires urgent and specfic legal and valuation advice which maybe outside the remit of the solicitor currently handling the property sale. Indeed it may make sense to delay a sale pending appropriate advice being sought, since the family will have no idea of their CGT liability at this point.

I would not be surprised if this matter ends up being referred to a specialist barrister for advice, since there would be few practicing solicitors with hands on experience of these types of schemes.

senor_naranja

Thanks for all your comments thus far, IHT does not really have a bearing as the property is only worth around £250K and Mum only had around 40K in the bank.

We have exchanged this week and look to complete next week , the lease  having been removed by the land registry following a notice period issues by us the freeholders(4 weeks)

I think I shall have to seek some professional advice as suggested but we only have 60days unless I can get some sort of stay of execution on submitting the CGT and I guess I ask the tax office about that?

J

_Penny_Dreadful

senor_naranja said:

Thanks for all your comments thus far, IHT does not really have a bearing as the property is only worth around £250K and Mum only had around 40K in the bank.

We have exchanged this week and look to complete next week , the lease  having been removed by the land registry following a notice period issues by us the freeholders(4 weeks)

I think I shall have to seek some professional advice as suggested but we only have 60days unless I can get some sort of stay of execution on submitting the CGT and I guess I ask the tax office about that?

J

Phoning HMRC will be useless. Spend your time finding an accountant who can help work out your liability. If you file your CGT late you can always file a late penalty appeal. If HMRC deem you had a reasonable excuse for filing late they won’t challenge the appeal. 

Not that you’d have to be dealing with any of this if someone hadn’t made a ham fisted attempt at DIYing their tax affairs. A little knowledge can be a dangerous thing.  

mybestattempt

senor_naranja said:

Thanks for all your comments thus far, IHT does not really have a bearing as the property is only worth around £250K and Mum only had around 40K in the bank.

We have exchanged this week and look to complete next week , the lease  having been removed by the land registry following a notice period issues by us the freeholders(4 weeks)

I think I shall have to seek some professional advice as suggested but we only have 60days unless I can get some sort of stay of execution on submitting the CGT and I guess I ask the tax office about that?

At this stage it's the acquisition value of the property which is the issue and clearly you need to get urgent professional advice on that.

I would contact HMRC and I'm sure they will advise you to make the CGT returns on time using an estimated figure if you don't have a  valuation by then and to change the CGT returns when you do. 

Grumpy_chap

poseidon1 said:

What are the terms of the 30 year lease? If the lease did not automatically terminate on the mother's death but continued until relevant notice was given to terminate , is there a value to be attributed to the rump of the lease, which presumably remains a separate and distinct asset of the estate until it is extinguished. It certainly cannot be ignored as if it does not exsist.

 

Sorry for your loss, OP.

I understand it would be common for this type of lease "reversionary property interest" to be 30 years or until death.  
Except, the OP says they had to serve 1 month notice to end the lease at 25 years, even though the mother was deceased by then.

This looks like a situation where the property was gifted to avoid IHT (which would be NIL in any case based upon the value of the Estate as advised by the OP).
In return, a CGT has been created which appears to be the value of the property 25 years ago allowing for the 30-year lease (probably very low) to the value of the property now with vacant possession (current full market value).

I can only suggest that the OP needs professional advice to assess the appropriate CGT liability.

mybestattempt

Grumpy_chap said:

poseidon1 said:

What are the terms of the 30 year lease? If the lease did not automatically terminate on the mother's death but continued until relevant notice was given to terminate , is there a value to be attributed to the rump of the lease, which presumably remains a separate and distinct asset of the estate until it is extinguished. It certainly cannot be ignored as if it does not exsist.

 

Sorry for your loss, OP.

I understand it would be common for this type of lease "reversionary property interest" to be 30 years or until death.  
Except, the OP says they had to serve 1 month notice to end the lease at 25 years, even though the mother was deceased by then.

This looks like a situation where the property was gifted to avoid IHT (which would be NIL in any case based upon the value of the Estate as advised by the OP).
In return, a CGT has been created which appears to be the value of the property 25 years ago allowing for the 30-year lease (probably very low) to the value of the property now with vacant possession (current full market value).

I can only suggest that the OP needs professional advice to assess the appropriate CGT liability.

Yes, and it's important the OP seeks professional advice to obtain a market value for the property at the date of was gifted to him and his siblings.

The solicitor's completion statement when the sale goes through next week will detail the sale price and legal fees to use in the capital gain calculation.

I would also advise making the CGT returns on time using an estimated acquisition value if a formal valuation isn't obtained by the date they are due.

It's far easier to change a return than to pursue a time consuming appeal against late filing penalties which HMRC might resist.

mybestattempt

_Penny_Dreadful said:

senor_naranja said:

Thanks for all your comments thus far, IHT does not really have a bearing as the property is only worth around £250K and Mum only had around 40K in the bank.

We have exchanged this week and look to complete next week , the lease  having been removed by the land registry following a notice period issues by us the freeholders(4 weeks)

I think I shall have to seek some professional advice as suggested but we only have 60days unless I can get some sort of stay of execution on submitting the CGT and I guess I ask the tax office about that?

J

Phoning HMRC will be useless. Spend your time finding an accountant who can help work out your liability. If you file your CGT late you can always file a late penalty appeal. If HMRC deem you had a reasonable excuse for filing late they won’t challenge the appeal. 

Not that you’d have to be dealing with any of this if someone hadn’t made a ham fisted attempt at DIYing their tax affairs. A little knowledge can be a dangerous thing.  

Late filing penalties can be avoided by using estimated/provisional figures in returns which can be changed when actual figures are available.

It is far easier to amend a return than pursuing an appeal in the hope HMRC will accept there is a reasonable excuse for the lateness.

While it may well have been a costly mistake to gift the property in 2001 it was probably done with the best intentions by a loving Mum.

poseidon1

senor_naranja said:

Thanks for all your comments thus far, IHT does not really have a bearing as the property is only worth around £250K and Mum only had around 40K in the bank.

We have exchanged this week and look to complete next week , the lease  having been removed by the land registry following a notice period issues by us the freeholders(4 weeks)

I think I shall have to seek some professional advice as suggested but we only have 60days unless I can get some sort of stay of execution on submitting the CGT and I guess I ask the tax office about that?

J

I do not imagine for one moment your widowed mother dreamt up this arrangement herself. I feel certain a solicitor would have been involved and indeed may have been responsible for advice and implementation. Indeed it may even have been an arrangement pre discussed and agreed  with your father and then executed post death.


Is there no paperwork , report, advice letter ( anything tangible), that could assist an accountant in ascertaining a base cost for the property following the grant of the lease?  In any event, the starting point will be probate value of the property at date of your father's death which could potentially be used to estimate the gain for intial reporting.

Any underpayment of tax will attract interest, but penalties are most unlikely in these circumstances especially if the return is submitted by an accountant on your behalf.

Given the very modest value of the property now, it is difficult to the comprehend what purpose this silly arrangement was designed to fulfill.

Keep_pedalling

poseidon1 said:

senor_naranja said:

Thanks for all your comments thus far, IHT does not really have a bearing as the property is only worth around £250K and Mum only had around 40K in the bank.

We have exchanged this week and look to complete next week , the lease  having been removed by the land registry following a notice period issues by us the freeholders(4 weeks)

I think I shall have to seek some professional advice as suggested but we only have 60days unless I can get some sort of stay of execution on submitting the CGT and I guess I ask the tax office about that?

J

I do not imagine for one moment your widowed mother dreamt up this arrangement herself. I feel certain a solicitor would have been involved and indeed may have been responsible for advice and implementation. Indeed it may even have been an arrangement pre discussed and agreed  with your father and then executed post death.


Is there no paperwork , report, advice letter ( anything tangible), that could assist an accountant in ascertaining a base cost for the property following the grant of the lease?  In any event, the starting point will be probate value of the property at date of your father's death which could potentially be used to estimate the gain for intial reporting.

Any underpayment of tax will attract interest, but penalties are most unlikely in these circumstances especially if the return is submitted by an accountant on your behalf.

Given the very modest value of the property now, it is difficult to the comprehend what purpose this silly arrangement was designed to fulfill.

It may have been one of those companies who also sell expensive but useless trusts after scaring people about care costs. It would clearly be utterly useless as a means of reducing a non existent IHT liability, and no doubt they charged a nice fat fee and are the only people who benefited from this pointless process. 

silvercar

I’d be inclined to pay the CGT based on the market value in 2001 and its sale price now. 

Any changes to that calculation can be amended as and when you see fit.