Can payment of a Legal Charge on property sale completion be deducted in CGT calculation?

mayflyjules

Sorry this is long but I can't find an answer anywhere else!

Summary of situation:

• My mother and father bought family home in '78, they split up and father moved out in '82, later divorced amicably, mother stayed in house and they both retained Joint Tenant ownership of it (father happy for my mother to live in it until she died).
• 2 years ago my mother got ill and ended up needing to go into a nursing home. Due to her joint ownership of the house she had to pay full care fees and we entered into a Deferred Payment Agreement with the local council to pay the fees. A Land Registry Legal Charge was put on the house for this so the council will get paid back when the house is sold.
• My mother passed away in May so my father has become the sole owner and the house has just gone on the market for sale. The council is owed c. £41.5k under the DPA, which they will receive as part of the sale conveyancing.
• As it was not my father's primary residence for most of the time they owned it, he's liable to pay CGT and I'm helping him to get an idea of how much he'll need to pay.

Question:
Since it is called "Capital Gains* Tax and is meant to be a tax on *profits* from a sale, and the £41.5k DPA debt will be paid direct from the solicitors to the council as part of the sale completion so my father will never receive that money, I would have thought that the debt amount should be deducted in the CGT calculation, but when I use the gov.uk calculator it doesn't seem to allow for this, so now I'm wondering, can it be deducted or is he really liable to pay tax on a substantial amount of money that he won't actually receive?

The gov.uk calculator has this question:

How much did you pay in costs when you stopped owning the property? This is what you paid for:

• estate agents or auctioneers
• solicitors or conveyancers
• any professional help to value your property, for example a surveyor or valuer
• advertising to find a buyer

So this doesn't mention something like a payment related to a charge on the property. I understand that paying off a mortgage as part of a sale isn't deductible because there's already a deduction for the purchase price and you can't deduct mortgage interest, but the DPA charge isn't related to the purchase.

I've googled it and searched in this forum but can't find anything mentioning this kind of charge in relation to CGT.

poseidon1

Simple response to your question, neither the LOA debt or costs incurred in registering the charge are allowable expenditure for CGT purposes.

The debt is of course a deduction against your mother's estate purely for probate and IHT purposes.

Turning too the actual calculation of CGT by reason of the sale by your father, are you aware that the calculation is in two parts?

The 1st part relates to your mother's half share at death. This half share receives a market value uplift for cgt purposes so any gain on that half is unlikely to  produce a gain on a sale so close to death, but may produce a loss related to 50% of sales costs( Solicitors and estate agents fees). Did you get a valuation of the property at death?

Your father's half share of the gain is time apportioned from the date he moved out in 1982 with a deduction for 50% of the solicitors/ agents fees. 

Finally turning to your mother's estate. Since she was not married to your father when she died, her half share of the house together with any other personal assets only receives the basic £325k nil rate band for IHT purposes ( £175k residence nil rate band disallowed). 

How, have you dealt with reporting your mother's estate for probate/IHT?   Did you ( incorrectly) exclude the market value of her half share of the house? If so note the following guidance -

https://www.gov.uk/tax-property-money-shares-you-inherit/joint-property-shares-bank-accounts

mybestattempt

poseidon1 said:

Simple response to your question, neither the LOA debt or costs incurred in registering the charge are allowable expenditure for CGT purposes.

The debt is of course a deduction against your mother's estate purely for probate and IHT purposes.

Turning too the actual calculation of CGT by reason of the sale by your father, are you aware that the calculation is in two parts?

The 1st part relates to your mother's half share at death. This half share receives a market value uplift for cgt purposes so any gain on that half is unlikely to  produce a gain on a sale so close to death, but may produce a loss related to 50% of sales costs( Solicitors and estate agents fees). Did you get a valuation of the property at death?

Your father's half share of the gain is time apportioned from the date he moved out in 1982 with a deduction for 50% of the solicitors/ agents fees. 

I'm afraid I don't agree with your method for calculating the capital gain arising when the property is sold as it seems the father is sole owner of the property (by survivorship as it was joint tenancy) from the date of death of the mother.

That being so there is only one gain and it's the acquisition cost/value which is made up from two separate figures.

As the property was bought jointly before 31 March 1982 the acquisition value is half the value at 31 March 1982 (rebasing) plus half the value at the date of the death of the mother.

All the sales costs are deducted to arrive at the capital gain.

The capital gain when the property is sold will be:

Amount the property was sold for
•less half the value at 31 March 1982
•less half the value at the date of mothers death
•less the sale costs

Depending on the date the father moved out of the property in 1982 there maybe an amount of private residence relief to cover part of the gain.

silvercar

There is a piece of the jigsaw missing. Who lived in the house when your mother moved into care? If a dependent was living in the house I would have thought the local authority wouldn't have had a claim on it.

mayflyjules

silvercar said:

There is a piece of the jigsaw missing. Who lived in the house when your mother moved into care? If a dependent was living in the house I would have thought the local authority wouldn't have had a claim on it.

The house was empty so the LA had a claim. That part is long decided.

poseidon1

mybestattempt said:

poseidon1 said:

Simple response to your question, neither the LOA debt or costs incurred in registering the charge are allowable expenditure for CGT purposes.

The debt is of course a deduction against your mother's estate purely for probate and IHT purposes.

Turning too the actual calculation of CGT by reason of the sale by your father, are you aware that the calculation is in two parts?

The 1st part relates to your mother's half share at death. This half share receives a market value uplift for cgt purposes so any gain on that half is unlikely to  produce a gain on a sale so close to death, but may produce a loss related to 50% of sales costs( Solicitors and estate agents fees). Did you get a valuation of the property at death?

Your father's half share of the gain is time apportioned from the date he moved out in 1982 with a deduction for 50% of the solicitors/ agents fees. 

I'm afraid I don't agree with your method for calculating the capital gain arising when the property is sold as it seems the father is sole owner of the property (by survivorship as it was joint tenancy) from the date of death of the mother.

That being so there is only one gain and it's the acquisition cost/value which is made up from two separate figures.

As the property was bought jointly before 31 March 1982 the acquisition value is half the value at 31 March 1982 (rebasing) plus half the value at the date of the death of the mother.

All the sales costs are deducted to arrive at the capital gain.

The capital gain when the property is sold will be:

Amount the property was sold for
•less half the value at 31 March 1982
•less half the value at the date of mothers death
•less the sale costs

Depending on the date the father moved out of the property in 1982 there maybe an amount of private residence relief to cover part of the gain.

Agree, had indeed overlooked the opportunity to use the 31 March 1982 rebased property value for the father's half share.  Unfortunately for the OP that  does introduce additional complexity in trying to ascertain that value without the intervention and cost of a qualified RICS Surveyor.

RICS do highlight a few resources to try and DIY this process below-

https://www.ricsfirms.com/glossary/1982-market-values-for-residential-and-commercial-property/

Of the various options the VOA' s own 31 March 1982 database maybe the most relevant below, although even that seems to have significant gaps in its coverage.

https://webarchive.nationalarchives.gov.uk/ukgwa/20141002135500/http://www.voa.gov.uk/DVS/propertyMarketReport/1982/housingValVacantPossession.html

Failing this Nationwide's house price index calculator may provide a measure of 'fine tuning' on a post code basis

OP needs to bear in mind that whatever  basis used does not necessarily avoid an  ultimate HMRC challenge to the base value ascertained, but hopefully will indicate an effort to apply a degree of diligence in the absence of a RICS valuation.

Depending on the overall gain involved, OP might benefit from delegating this task to a tax accountant. Helpfully the cost of such assistance is tax deductible from the gain.

silvercar

Given that it has been empty for 2 years and your father presumably has not needed to sell it up to this point, does he actually need the money?

I’m guessing he’s quite elderly. If he doesn’t need the money, I’d be doing a calculation as to whether it is worth selling it at this point in time. There is no CGT on death, so his estate would benefit from the full value less the DPA charge. In the interim it could be rented out, giving him some income. 

poseidon1

silvercar said:

Given that it has been empty for 2 years and your father presumably has not needed to sell it up to this point, does he actually need the money?

I’m guessing he’s quite elderly. If he doesn’t need the money, I’d be doing a calculation as to whether it is worth selling it at this point in time. There is no CGT on death, so his estate would benefit from the full value less the DPA charge. In the interim it could be rented out, giving him some income. 

Assuming LOA  agree to letting house,  the father would have to contend with the interest compounding daily on the DPA as well as the dubious benefit of being a landlord in a current hostile environment for landlords. 

In reality the burden of operating the letting as well as ongoing compliance with LOA would have to fall on the OP rather than his elderly father. Not something I would willingly take on in preference to a clean break sale.

mayflyjules

mybestattempt said:

poseidon1 said:

Simple response to your question, neither the LOA debt or costs incurred in registering the charge are allowable expenditure for CGT purposes.

The debt is of course a deduction against your mother's estate purely for probate and IHT purposes.

Turning too the actual calculation of CGT by reason of the sale by your father, are you aware that the calculation is in two parts?

The 1st part relates to your mother's half share at death. This half share receives a market value uplift for cgt purposes so any gain on that half is unlikely to  produce a gain on a sale so close to death, but may produce a loss related to 50% of sales costs( Solicitors and estate agents fees). Did you get a valuation of the property at death?

Your father's half share of the gain is time apportioned from the date he moved out in 1982 with a deduction for 50% of the solicitors/ agents fees. 

I'm afraid I don't agree with your method for calculating the capital gain arising when the property is sold as it seems the father is sole owner of the property (by survivorship as it was joint tenancy) from the date of death of the mother.

That being so there is only one gain and it's the acquisition cost/value which is made up from two separate figures.

As the property was bought jointly before 31 March 1982 the acquisition value is half the value at 31March 1982 (rebasing) plus half the value at the date of the death of the mother.

All the sales costs are deducted to arrive at the capital gain.

The capital gain when the property is sold will be:

Amount the property was sold for
•less half the value at 31 March 1982
•less half the value at the date of mothers death
•less the sale costs

Depending on the date the father moved out of the property in 1982 there maybe an amount of private residence relief to cover part of the gain.

Thank you for this response. Since what was my mother's share of the house has now gone to my father, and her share isn't considered part of her estate for probate purposes, I hadn't considered that only half of the purchase & sale prices should be counted for the CGT calculation (and of course the DPA debt would be within my mother's half so it takes care of that problem), and I didn't see anything mentioning this in my searches, so this is really valuable information!

There is 9 months of PRR from before he moved out plus 9 months from before the house is sold that he can claim, so I've already accounted for that.

mayflyjules

poseidon1 said:

mybestattempt said:

poseidon1 said:

Simple response to your question, neither the LOA debt or costs incurred in registering the charge are allowable expenditure for CGT purposes.

The debt is of course a deduction against your mother's estate purely for probate and IHT purposes.

Turning too the actual calculation of CGT by reason of the sale by your father, are you aware that the calculation is in two parts?

The 1st part relates to your mother's half share at death. This half share receives a market value uplift for cgt purposes so any gain on that half is unlikely to  produce a gain on a sale so close to death, but may produce a loss related to 50% of sales costs( Solicitors and estate agents fees). Did you get a valuation of the property at death?

Your father's half share of the gain is time apportioned from the date he moved out in 1982 with a deduction for 50% of the solicitors/ agents fees. 

I'm afraid I don't agree with your method for calculating the capital gain arising when the property is sold as it seems the father is sole owner of the property (by survivorship as it was joint tenancy) from the date of death of the mother.

That being so there is only one gain and it's the acquisition cost/value which is made up from two separate figures.

As the property was bought jointly before 31 March 1982 the acquisition value is half the value at 31 March 1982 (rebasing) plus half the value at the date of the death of the mother.

All the sales costs are deducted to arrive at the capital gain.

The capital gain when the property is sold will be:

Amount the property was sold for
•less half the value at 31 March 1982
•less half the value at the date of mothers death
•less the sale costs

Depending on the date the father moved out of the property in 1982 there maybe an amount of private residence relief to cover part of the gain.

Agree, had indeed overlooked the opportunity to use the 31 March 1982 rebased property value for the father's half share.  Unfortunately for the OP that  does introduce additional complexity in trying to ascertain that value without the intervention and cost of a qualified RICS Surveyor.

RICS do highlight a few resources to try and DIY this process below-

https://www.ricsfirms.com/glossary/1982-market-values-for-residential-and-commercial-property/

Of the various options the VOA' s own 31 March 1982 database maybe the most relevant below, although even that seems to have significant gaps in its coverage.

https://webarchive.nationalarchives.gov.uk/ukgwa/20141002135500/http://www.voa.gov.uk/DVS/propertyMarketReport/1982/housingValVacantPossession.html

Failing this Nationwide's house price index calculator may provide a measure of 'fine tuning' on a post code basis

OP needs to bear in mind that whatever  basis used does not necessarily avoid an  ultimate HMRC challenge to the base value ascertained, but hopefully will indicate an effort to apply a degree of diligence in the absence of a RICS valuation.

Depending on the overall gain involved, OP might benefit from delegating this task to a tax accountant. Helpfully the cost of such assistance is tax deductible from the gain.

Thank you for your responses. I already looked into the rebased value when doing my calculations yesterday and found that RICS page. I got a couple of comparative valuations from the links (unfortunately the VOA link no longer contains the mentioned tables, which have been archived and so far I haven't found them in the archive, only data from 1995 onwards) and will do some more digging when I get a chance. We have a tax accountant in the family who I'm hoping will help out when the time comes!

mayflyjules

silvercar said:

Given that it has been empty for 2 years and your father presumably has not needed to sell it up to this point, does he actually need the money?

I’m guessing he’s quite elderly. If he doesn’t need the money, I’d be doing a calculation as to whether it is worth selling it at this point in time. There is no CGT on death, so his estate would benefit from the full value less the DPA charge. In the interim it could be rented out, giving him some income. 

Thanks for the suggestion, but renting it out isn't an option. The council need to be paid back asap and none of us have that kind of money laying around to pay it before selling the house, and it would need renovations before we could rent it, which again none of us have the money for or the energy for, but moreso it's the emotional toll of holding onto that house for another few years that we don't need. Better to just let it and the memories go.