Capital Gains Tax Deferring

porg

Our mothers house was gifted to us 6 years ago she is still living in the house, however we are looking into buying another house which will suit her needs more. The question is can we defer the Capital Gains Tax we would have to pay on the sale so the whole amount can be used to purchase the new house. The CGT being paid on the sale of the new house in the future.

Elaine_Wilson

I'm not really sure but I thought this sort of deferral now only applied to business assets. So the answer to your question is no.

I hope some expert will come along soon and prove me wrong.

Have you taken advice on this situation? I ask because it seems that the gift could be a gift with reservation of benefit by virtue of her occupation and the value of the house may still fall to be included in her estate for Inheritance Tax purposes.

Also the Pre-Owned Asset Tax may apply in these circumstances.

jimmo

I am afraid Elaine_Wilson is absolutely right. You certainly cannot claim Dependant Relative Relief which was stopped in 1988.
When you say “Us” What exactly do you mean? If you are talking about four children of your mother who are all married then you could split the gain on the property 8 ways.

porg

Elaine & Jimmo

Thanks for your replies. Perhaps you could enlighten a little more in respect of a few other things. The property was gifted to my sister and myself about 5 years ago when does the CGT kick in. Is it on the value of the whole property when first purchased by our mother and its value now, or on the amount it has risen since it was gifted to us. Jimmo we are married would it really make that much difference splitting it between the four of us, would we have to gift it to our married partners as well? and the last question is could we not just gift it back to our mother who has lived in the house the whole time. Although that seems like we want the whole cake and eat it.

Thanks for everything it really does help us to make our minds up as to what to do for the best.

CLAPTON

The CGT is based on the difference in price at the time it was gifted to you and your sister and the price now.
Assuming that the house was legallly transferred to you (i.e. your names are on the deeds) then you are responsible for paying the CGT.

CGT would still be payable if you gifted it back to your mother as this counts as a disposal for CGT purposed.

Both of you have a CGT allowance of 9,200. So simply by way of example, if the gain in the house price over the last 5 years was say 100,000 then you can deduct selling cost say 4k leaving a gain of 96,000.
So your share is half that being 48,000 ... you have a cgt allowance of 9,200 so have a gain of 38,800... the rules change in april but if you sell after 6th april then you pay tax at 18% i.e. 6,986.
Similarly your sister pays the same.

The benefits of giving half your share to your spouse is that both of you can use their CGT allowance of 9,200 so your gain of 48,000 would become 24,000 less 9200 being 14,800 so tax at 18% is 2,664. Obviously your spouse pays the same but your original bill of 6,984 falls to a joint bill with your spouse of 5328... so useful but there may be costs of transferring ownership to consider.

porg

Clapton

Many thanks for your reply, can I just ask about the 18% you mentioned. Is this an accross the board amount when introduced in April or graduated dependant on earnings.

CLAPTON

after april 6th the tax is a flat 18% (assuming the government doesn't changes their minds)

prior to april 6th , there is taper relief to consider and then the tax is at 10, 20 or 40% and its added on the top of your other income
Taper relief would be about 10-15% depending upon the exact dates of transfer and sale.

porg

Clapton

I take it CGT is paid by the individual, ie if the sale went through prior to 5th April it would be paid in the tax year January 2009, or if after 5th April the tax year 2010.

porg

And I promise last question, would the fact that I do not work through choice allow me to claim more back than the allowance you mentioned.

CLAPTON

Not entirely sure when the tax is due but i would expect jan 2009.

If you don't have any other taxable income and you sell this tax year then you benefit from the first 2230 being at 10% but otherwise, no, it makes no difference.

jimmo

I am afraid that you will need at least some professional advice. When your mother gifted the house to you and your sister she didn’t actually give you the “entirety”. What she actually gave you was a house with a sitting tenant paying no rent (her).
So you need the open market value of the house with the sitting tenant paying no rent at the date of your mother’s gift to you. I am afraid that is very different to the market value of a house with vacant possession. I do know that the District Valuer, who does all the valuation work for the taxman, uses actuarial life expectancy tables when working this out.
If your mother was relatively young at the time of the gift and had an actuarial life expectancy of 20 years the open market value of the house at that time will be the price an investor was prepared to pay for the house assuming he could get no rental income for 20 years and not be able to move in.
If your mother was much older at the time, say already past normal life expectancy the open market of the house with her in residence will have been a lot closer to open market value with vacant possession but almost certainly less than vacant possession.
Until you get the valuation sorted you really cannot plan very much.
I am afraid that you need to approach a local Valuer or estate agent for a professional opinion of the open market value of the house with your mother as a sitting tenant paying no rent at the date of the gift.
Please print this off and show it to him and make sure he understands exactly what has to be valued. I am afraid that this sort of circumstance was “easy pickings” in my job. People such as yourselves suffered because they got an open market valuation of a house with vacant possession.
Once you’ve got a valuation and have some idea of the selling price, then you can start to estimate the capital gain.
Assuming that neither your sister nor you have lived in the house since the gift I think the chances are that gifts to your spouses are likely to be worthwhile and the tax saving will be worth a lot more than the costs of making the transfers. You can only make a real judgement when you know the amounts involved.