IHT/CGT double whammy

Liloly

I am posting this as an illustration for the benefit of others as to what may seem like a good idea at the time but turns out not to be.
In 1997 my mother decided to transfer her home into my name. It was worth about 60k at that time. She felt this was the best thing to do but of course continued to live there and pay the outgoings. Early last year she died and she was one of those elderly people who spent little money and as you may have guessed she had over 285k in her estate and there was an IHT bill of about 17k. (It was pointed out to her by her solicitor at the time of transfer that the house would at some point be treated as part of her estate but in 1997 she was well under the IHT threshold as house prices were relatively low then.)
Now as the years went on and house prices went up, I began to realise that at some stage as the legal owner I would be liable for CGT at such time as the house may be sold. As I have my own house, I did indeed sell the property last summer for a net amount of about 153k.
I contacted HMRC to inform them and ask for a Post Transaction Valuation Check. They were actually very helpful and by the end of last year the notional value of 60k was accepted by the District Valuer as the base figure for the Capital Gain.
I have just completed my self assessment and done an approximation of the amount of tax due that I will have to pay and it is about 15k. The Capital Gain has of course pushed me into the 40% bracket for some of my income for the last tax year.
Now I know that hindsight is a wonderful thing, but if the house had remained in my late mothers name I would have had NO Capital Gain whatsoever.
My late mother also never utilised any of her £3000 annual gift exemptions and we did enquire with HMRC when the estate was in administration as to whether two unused years worth could be offset against the gift, but they said that gifts with reservation are excluded from the annual exemptions.
What is also galling is the fact that last October Mr Darling changed the law regarding any unused IHT amount not utilised by a persons late spouse. Of course as she died in February we have lost out here as well.
In effect if my mother had not transferred the house to my name and stated alive until last October, we would have saved about 32k in tax.
Please everyone, if you or your elderly parents are thinking of transferring their property into your name, please please think again.

CLAPTON

Of course you are quite correct.

However, its interesting to reflect that if house prices hadn't risen, you would of course have paid no tax.
You would, of course have had a lot lower inheritance and been poorer.

Would you have been happier?

Liloly

I do understand that if my mother had paid me a realistic rent that the house would not have been part of her estate, however that in itself would have taken her out of IHT as say she had paid £100 a week which would have been 50k over 10 years, her estate would have been under 285k even including the house. Of course I would have paid about 11k extra income tax over that period. It would have been impossible to persuade my mother to have done that as she had very set ideas, for example she always kept about 25k in a current bank account paying 0.01% gross interest and nothing would persuade her to move some of the money to a decent interest paying account.
Clapton you have made a good point and in doing so have cheered me up!
Yes I should be thankful that my inheritance is more than it would have been if house prices had not increased. Would I have been happier if they had not done so, no probably not.
Having dropped my tax return in at the local HMRC office today, I felt I should warn others about the pitfall I have come accross and if it makes someone else stop and think then that's good.
There are worse things that can happen to your money than the tax man legally taking it, I suppose, such as someone gambling it away or defrauding you in some way.

Liloly

Fear of the local council seizing the house should she eventually need to enter a care home was the reason she did what she did. Also at that time I was made redundant and there was a real possibility of my having to sell my house and move in with her. Luckily I got another job in about 3 months so it didn't happen.
She did go into a care home for what turned out to be the last 3 weeks of her life although we did not know at that time she was going to die so soon.
My mother worked hard as a nurse for 40 years and bought her house after my father died when I was a child and she was paranoid that it could be taken from her to pay for her care at some future stage.
I know this is a real fear for many however I would always advise against doing what my mother did and would advise taking your chance at not needing a care home. The local authority will usually do their worst as I believe there is no set time in law after which they will disregard a transfer of property. You must also never openly admit to them it was transferred for the purpose of avoiding care home fees as you will have then compromised yourself.

silvercar

If you had waited until this April to sell, the capital gains tax would have been limited to 18%. (Though full taper relief presumably meant that the CGT was reduced by 40% in any case.)

insured

Lioly,
It must have been a bit of a shock for you when you thought what you were doing was for the good of your mum, but turned out otherwise.
You did it to avoid her home being used too quickly if she needed a home.
As it was, she didn't which is good.
But at least both you and her had the peace of mind when she was alive to know that if she did need residential care, then the house would have been there to top up what the council would provide, and would therefore have lasted much longer than if it was sold straight away.
Try to think of it as insurance. You took it out, but you did not need it. However, it was peace of mind.
Just because you did not need it does not illustrate the fact that it was not a good decision at the time. You did not know what was going to happen. Given the information you had at the time, you did what you thought best.
However, if you had been correctly advised, you would have been told not to transfer the ownership directly to yourself, but to a trust. The trust would have retained the PPR exemption for your mum. It would not have had any effect on the IHT bill, but it would have reduced or eliminated the CGT.
Also, if you had been made redundant and had to rely on means tested benefits, the value of your "mums" house would have been taken into consideration when calculating it.
I think Clapton was right. If the house prices had not risen, your inheritance would have not been so great. Glad you have been cheered up!

insured

margaretclare wrote: »

How? The house did not belong to Mum any more but to her daughter. It would therefore NOT have been there to 'top up' what the council could provide.

The house may not have belonged to mum, but would have still been within the family to do with as the family thought best for mum.
Of course it would have been there. Where else would it have been?
Why do you think the OPs mum transferred it to them in the first place?
This is an arrangement common to many close families.
Just because you do not think you could trust your family to do right by you, does not mean that everyone else cannot trust their families.

JohnnieW

Margaret, I find it astounding that you cannot understand the point that insured is making.
The house remains in the family. It really does not matter which member of the family owns the house.
That will ensure that the money from the house sale (if it is sold) can be used to top up what the LA will not provide/
Which part of that can you not grasp?

margaretclare wrote: »

I have not mentioned my family That is irrelevant.

.[/quote

It is relevant, because time and again you make judgements about this sort of situation, and you base those judgements on what happens in your own family.

Now, I am sure, as always, you will want the last word, so we shall let you ......