Capital Gains Tax and PETs

Delupin

Hello,

I have an informal query for which I hope somewhere here may be able to provide illumination. I have looked through the last 16 pages of posts and I cannot find anything that is a reasonable facsimile of my own circumstances. Those circumstances are as follows.

My father inherited 3 properties on the death of his father in 1980. The business was carried through with relative expediency and the properties came into his name in roughly 18 months or so, thus his acquisition of these properties was before the March 1982 Index Allowance cut-off date as detailed in Inland Revenue documentation; this may or may not have any relevance. Earlier this year he decided to transfer one of these properties into my name and has instigated proceedings for a "potentially exempt transfer", with its concomitant 7 year rule to avert the full thrust of Inheritance Tax. Now to the the details of this property.

The property, at the time of his inheritance/acquisition of it in 1980, was worth approximately £11,000. It is now worth approximately £200,000; due more to the enormous inflation of London property prices than any guile on his part, though he did enhance the property now and then where necessary (double glazing, central heating, decoration, fireplaces, etc). He has never lived in the property.

His own circumstances are such that he lives on a pension of £700 p/m and the rental income from a second property (also in London). He is retired, in good health, and as likely to live for 7 years as the next man. He also owns outright the house he lives in.

I currently live in the property which my father intends to transfer to me and have done so for the past two years. My intention is to sell the property within 6 months of its transfer into my name. I expect to receive at least its market value if not more; I have already had interest from potential buyers prepared to offer in excess of its ostensible market value.

So my question is, will my father be subject to capital gains tax on the transfer of this property to me under the aegis of a "potentially exempt transfer"? If so, is he able to claim any tax relief beyond index allowances, taper relief, disposal, acquisition and enchancement costs? e.g. some sort of retirement founded relief (discounting the provisions of the IR's form IR289 which relates to business disposal and is not pertinent here). Is the poentially exempt transfer of this house compromised by my intention to sell the property with all expediency?

Furthermore, if capital gains tax is applicable, would the gain be calculated from the market value of the house at the point of disposal or the amount I actually receive (which may be in excess of the market value) from its sale? Also, as a retired person, which CGT tax band would my father fall into? 10%, 20% or 40%?

The main question though, and the one that vexes me most, is whether or not my father will incur a CGT charge by proceeding with a PET. Apologies for the repetition of his query.

I hope someone can help.

Kind Regards,

Delupin

oceanblue_3

Delupin

Your father's gift to you would be classed as a disposal for CGT purposes; as such, he would be liable to pay CGT.

Delupin

Having done a few more hours' research since I composed my original post, I have to say I've come to the same conclusion. I've endeavoured to put together some sort of provisional calculation of how much capital gains tax he will be liable to pay; I used the Inland Revenue's website and online help sheets as a guide in this. I'd appreciate it if you, or anyone else, could takea look over it and check whether my calculations are correct and feasible.

.....

Disposal Proceeds: £180,000
Incidental costs of disposal: £400

Net disposal proceeds: £179,600

Cost of acquisition/value at inheritance: £11,000 (in 1980, possibly as much as £15,000 at March 1982)
Incidental costs: £1,000
Enhancement expenditure: £25,000

Total Cost: £41,000 (provisionally, at 1982 values)
Chargeable gain: £138800

Indexation Allowance
Acquisition costs: £16,000 x 1.047 = £16,752

Enhancement expenditure: £15,000 (prior to April 1998) x 0.8 (averaged index allowance over period of 15 years) = £12,000

Total chargeable gain after indexation allowances: £110,300

Taper relief: 75% (7 years since April 1998)

Total chargeable gain: £82,725

Capital Gains tax rate: 20% (22% income tax rate)

Total capital gains tax due: £16,545


......

Does that sound about right? Are there any further deductions I have neglected? Have I overestimated any of the deductions?

Kind Regards,

Delupin

oceanblue_3

Delupin, that looks pretty comprehensive to me, although I would be inclined to run it past a friendly accountant to get an expert opinion.

Nevertheless, your uncle mey be entitled to claim an additional year's taper relief since the asset was held prior to 17/03/1998.

Also - don't forget his annual exemption of £8,500.00.

Also, with gifts of this nature, there is the potential for considerable interaction between CGT and IHT. The starting point would be....what would be a fair market valuation of the house? That is the value that would be used in any IHT calculation.

Finally, as far as I can see, this would be a PET for IHT purposes; therefore, no immediate IHT liability.

Delupin

Thanks very much, Ocean.

Is the annual exemption of £8,500 subtracted at the very beginning from the disposal proceeds, or at some later point? e.g. from the adjusted net gain of £82,725?

If an an extra year of taper relief is applied for holdings prior to April 1998, I suppose it may be worth holding off on the transfer until the next May, when the applicable taper relief rate will be 65% (9 years). This might slow things down but, if it represents a significant saving, it seems worthwhile.

If I can get a market valuation that is, perhaps, slightly lower than a theoretical mean of, say, 10 valuations, can I submit such a lower valuation to the IR? Also, does anyone have any idea just how thorough the IR is in the investigation and challenge of market valuations. Plainly, a market valuation would be of most use now, since London property prices are in a state of constant upward flux.

Thanks,

Delupin

oceanblue_3

Delupin

The annual exemption is decucted from the CGT due. For example, if the CGT due is £20,000.00, then the annual exemption reduces the sum payable to £11,500.00.

As far as reporting to the IR is concerned, the onus is on your uncle to declare the gift. For it to be legal and, from your point of view, probably incapable of being challenged successfully, the Land Registry will have to be informed, and a re-registration of title submitted. As long as it is a "fair" value, I don't think you will have any problems.

I'm hoping that another poster, Telly-Addict will see this thread - he has more knowledge in theses areas! Nevetheless, I think you're on the right track.

brantwood150

oceanblue wrote:

Delupin

The annual exemption is decucted from the CGT due. For example, if the CGT due is £20,000.00, then the annual exemption reduces the sum payable to £11,500.00.

Not quite.

The £8,500 exemption is deducted from the amount of the net gain, not from the CGT due. Thus if gain is £20,000, the amount chargeable would be £11,500 and the tax payable (for a higher rate taxpayer) would be £11,500 x 40% = £4,600.

oceanblue_3

Sorry - my mistake! You're right, the annual exemption exempts some of the gain, not some of the tax due. At least I erred on the side of caution!

nlpnlp

Your father's original cost for the property would be either the 1980 value unless he elected to have all assets held at March 1982 use the March 1982 value. The March 1982 election can be made within 2 years of when the first asset held at March 1982 is disposed of.

Capital gains are taxed at 10%, 20% and 40% depending on how much income and gains you have in the year. Once your taxable income and gains are over £32,400 your father will be paying 40% tax on the gains.

Delupin

So, as per my calculations above, the £8,500 allowance would be deducted from the total chargeable net again of £82,000? It would then be a matter of £73,500 x 0.2 = £14,700. Plus any other alterations to taper relief.

Is there anything else they're likely to spring on the old man? The transfer of the property to my name is in the hands of a firm of solicitors who have been appointed to act on both my father's and my behalf. Presumably they will take care of any actions which concern the Land Registry.

telly-addict

nlpnlp wrote:

Your father's original cost for the property would be either the 1980 value unless he elected to have all assets held at March 1982 use the March 1982 value. The March 1982 election can be made within 2 years of when the first asset held at March 1982 is disposed of.

Capital gains are taxed at 10%, 20% and 40% depending on how much income and gains you have in the year. Once your taxable income and gains are over £32,400 your father will be paying 40% tax on the gains.

If an asset is owned at March 82, you actually need to do two computations - one with cost and one with March 82 value. The indexation is calculated on the higher of cost and MArch 82 value for each computation. You then use the gain which is lower. You must remember to exclude from the MArch 82 calculation any enhancement expenditure which would be reflected in the value at 31 March 82. You would need to contact a Chartered Surveyor to get a valuation - the Inland Revenue will liaise with the District Valuers Office regarding the value. Obviously you will want it as high as possible, they as low.....

Definitely seeking a quote from a local Chartered Accountant or Chartered Tax Adviser to help you with this - especially if negotiations are needed re a valuation.