Poor advice?

hebog_2

Eight years ago my wife and I purchased the house next door so that my mother and father could move in to baby sit. At that time someone told us to put the house in my parents name so that when it came round to selling it we would not be elligible for CGT if there was any to pay. After any sale my mother and father would simply give us the money from the sale of the house. We did not do that and registered the house in our name.
Well the time has come to sell. My mother and father are moving out and we have a house on our hands. At no time during the 8 year period have my mother and father paid us any money, in fact we have paid all the rates including water bills. The house was purchased for £45,000 and is now valued at £140,000. We have spent some £5,500 on the house including the conveyincing costs at the time of purchase.
Simply put we obviously owe some CGT. We have worked out with all the taper relief and personal allowances that there would be a sum of about £18,000 to pay. Quite a wedge.
It has crossed my mind that it is still not too late to transfer the house into my parents names which would mean they sell the house in name only and then give us the money. After such a long winded post my simple quetion is would this still be possible? If so would there be any tax to pay on the money they gifted to us?
I know that some out there will think we are cheating the tax man, I do not feel that way. We would use the money to move to a bigger house ourselves. We are not big time property developers or money makers, we just want a better home for us and the kids. All the money we have used to buy next door was hard earned and I just feel that in our situation CGT seems a bit unfair.
One last thought if the above is not possible, would all the rates we paid such as Council tax and water rates be deductable from the Gain?

???

MJSW

Transferring the property into your parents names now would be pointless from a tax viewpoint. As they are 'connected persons', any disposal to them automatically takes place at the market value of the asset, regardless of the actual price paid. So even if you gave it to them for nothing, you would be taxed as if you had sold it for the full market value. So essentially you would pay the same amount of CGT as if you sold it directly to the third party for the market value.

Running expenses on the property can't be deducted from the gain. However, they could have been deducted from the rental income received on the property (if there had been any!).

All the money we have used to buy next door was hard earned and I just feel that in our situation CGT seems a bit unfair.

Why does it seem unfair? You've invested about £50,000 and made a £90,000 profit in 8 years. That's a sizeable profit. Some people wouldn't earn that much in salary for 8 years hard graft. Just be grateful you've done so well out of it.

MJSW

One thing you could try is to move into the property once your parents have moved out and live there for a while (a few months should be sufficient). As long as the Inland Revenue accept that it has become your main residence, you get the final 3 years of ownership exempt from CGT (approx 3/8 of the gain). In addition, you may also qualify for lettings relief for the period when it was 'let' to your parents, although I'm not sure whether letting them live rent free would qualify as a let.

hebog_2

MJSW I appreciate your forthright reply which does tend to put things into perspective.



One other thing someone else has mentioned is addging my parents to the deeds of the property i.e. four names on the deeds therefore there would be 4 amounts of personal relief available. Is that an option?

MJSW

It is an option, but its unlikely to be of much use for tax planning for the reasons above. If you gift each of your parents a 1/4 share in the property, you are still treated as selling it to them for market value for CGT purposes. Therefore the gain is still assessed on you rather than your parents. Their deemed cost would also be the market value, so if the property is then sold (for market value), they wouldn't make a gain and so you haven't used their annual exemption. (It would however cover any increase in value between the date of gift and the date of sale.)

It may have advantages if you could get the gains in different tax years to get two years worth of annual exemptions. eg transfer half to parents now (half of gain in 04/05 tax year), and then sell the house on 6 April 2006 (other half of gain in 05/06 tax year). However, this would only work if it is genuinely a gift, and if a share of the proceeds from the sale genuinely belonged to your parents. If they simply give you the money back, the Inland Revenue are likely to regard the arrangement as a sham.

hebog_2

I only found this site a couple of nights ago and have been reading it solid since that time. Very useful information and with contributors like MJSW I will be returning on a regular basis. Thanks for the information. Plenty to mull over.