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TonyTax
TonyTax, Tax Consultant
Category: Tax
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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Property transfered by mother in 1998 under GWR.She stayed

Customer Question

Property transfered by mother in 1998 under GWR. She stayed there until Q2 2005, then moved out. I stayed there 2004 - 2006 as main residence but not only. Property sold in Q3 2006. Some improvements made between 1998 and 2005. What is my CGT calculation? Mrs Helene XXXXXXXX

Submitted: 3 years ago.
Category: Tax
Expert:  TonyTax replied 3 years ago.
Hi.

Can you tell me how much the property was worth when your mother gifted it to you in 1998 please. What month in 1998 did the transfer take place? Would you also let me know the exact period in 2004 to 2006 that you lived in the property (the month in 2004 you moved in and the month in 2006 you moved out). Which month in 2006 was the property sold and what was it sold for?
Customer: replied 3 years ago.

Property worth around £265K although will have to calculate using house price indices. I am still fine tuning this.


History in property: -


2001 - February2004. 3/4 Days per week giving care assistance.


Februiary 2004 - February 2006. Full time occupation. I had my own separate home with my husband, but this was not my main residence certainly from February 2004 due to the care arrangements I had to provided for my mother.


 


Sold May 2006 for £385,000. Less legal and agent's expenses.


 


I had 50% share and my brother also 50%. He did not stay in the property at any time after 1998.


 


I also have to deduct expenses paid by me in respect of enhancement to the property - new heating system, double glazing, structural alterations, etc. I would put these at approx. £15,000.


 


Regards

Expert:  TonyTax replied 3 years ago.

Thanks.

Can you tell me when in 1998 the transfer took place please.

Customer: replied 3 years ago.

I believe in September, but would need to verify with detailed look at records, which are not available to me at present. You could qualify your answer if this has significance.

Expert:  TonyTax replied 3 years ago.
Thanks.

That should be enough for me to do the calculations.
Expert:  TonyTax replied 3 years ago.
Hi again.

You made a gain of about £52,500 (£385,000 - £265,000 - £15,000 / 2) when the property was sold. As the property was jointly owned, the gain is split 50:50 even though you paid for the enhancements.

You are entitled to a deduction from the gain called taper relief which is determined by the number of complete years of your ownership of the property, this being seven in your case which entitles you to taper relief of 25%. The net gain is, therefore, £39,375 (£52,500 - £13,125). The annual CGT exemption of £8,800 reduces it further to £30,575.

A married couple can only have one main residence between them and unless your husband lived in the property with you whilst you were caring for your mother, I doubt that the tax office will allow any main residence exemption. That is unless you made an election for the property to be treated as your main home within two years of acquiring the property which I doubt you did as your mother was living there.

The net gain of £30,575 will be added to your income for 2006/07 in order to determine the tax rates to be applied to it. Take a look here for the tax rates for 2006/07. The CGT charge will be between £6,486.50 (10% and 22%) and £12,230 (40%).

I hope this helps but let me know if you have any further questions.
Customer: replied 3 years ago.

Thank you. Three clarifications: -


1.Does my residence not constitue a factual indication that this was my main residence at the time? Should I not be able to claim the last three years exempt from CGT as a second home?


2. My mother had left the premises before it was sold, thereby relinquishing her condition on the gift. Does this not make a difference to the calculation?


3. If GWR was not exempt from IHT (regardless of seven year rule), then should the property not be assessed under the Estate as opposed to CGT? Otherwise I do not see why Gifting property to children would be beneficial. I appreciate that my name is XXXXX XXXXX title.


 


I am looking at this because of the current Amnesty by HMRC. I had always assumed that my residency would mean no CGT was due. Perhaps I am wrong.


 


As a matter of interest, my brother paid £5/6k in CGT in 2006 without any residency factor. Your calculation looks if I will be even higher. Do you have any views on this?


 


Regards

Customer: replied 3 years ago.


Should have added that my mother died in 2009 - any significance?

Expert:  TonyTax replied 3 years ago.
Which month in 2005 did you mother move out of the property?
Customer: replied 3 years ago.

September 2005.

Expert:  TonyTax replied 3 years ago.
Thanks.

I'll get back to you in a bit with answers to your follow up questions.
Customer: replied 3 years ago.

OK. I will await your response before rating. I may be away from my computer for about an hour or so.


Regards

Expert:  TonyTax replied 3 years ago.
Thanks for your patience. You don't need to rate the answers until the end of the dialogue.
Expert:  TonyTax replied 3 years ago.
1 As I said in my original answer, a married couple can only have one main home between them at the same time. As you probably didn't make an election for the second property to be treated as your main residence, you won't get any main residence exemption unless both you and your husband lived there together.

2 The value of the gift for CGT purposes is determined by the date it was gifted to you. Take a look here for confirmation of that.

3 As your mother died within seven years of the ending of the GWR, the value of the property at that time (as opposed to when the gift was made) should have been included in her estate for IHT purposes but your cost for CGT purposes would still be the value at the time it was gifted to you. Take a look here and here for some commentary on the differences in IHT treatment of Gifts With Reservation and Potentially Exempt Transfers.

If a property is gifted but the owner continues to live there, then its not really been given away in the true sense and so the GWR rules exist to stop people taking advantage of the seven year rule when nothing has really changed.

There is no amnesty from HMRC on main residence simply because the gain was not disclosed at the time it should have been, ie by 31 January 2008.

Your CGT charge will be based on your circumstances, not your brother's. I'd need to know your brother's exact income circumstances for 2006/07 and what gain he disclosed before I could comment. The rates of tax applied to the gain depend on the level of your other income in the tax year that you disposed of the property. I gave you the best and worst case scenarios. The true liability will probably be somewhere in between.
Customer: replied 3 years ago.

Thanks again.


I am still confused, I'm afraid.


 


The following link: -


 


http://www.hmrc.gov.uk/manuals/ihtmanual/IHTM04072.htm appears to suggets that, as my mother gave up the reservation 3 years before death, then the property would be assessed for IHT or as a PET but not both.


 


"the transferor is treated as making a potentially Exempt Transfer (PET) (IHTM04057) of the gifted property, on the date the reservation ceased., FA86/S102 (4)." My bold type.


 


I am totally lost with this but I feel it has some relevance - unless you tell me different.


 


Regards

Expert:  TonyTax replied 3 years ago.

A PET is a potentially exempt transfer which can be charged to Inheritance Tax.

If a gift is made totally unencumbered, ie with no strings attached such as the right to continue enjoying the asset, then that is a potentially exempt transfer for IHT purposes and the seven year clock starts ticking at the time of the gift. If the donor lives for at least seven years after making the gift its value at the time of the gift will not be included in their estate for IHT purposes. If the donor dies within seven years of making the gift, its value at the time of the gift will be included in their estate for IHT purposes.

The original gift was not a "chargeable transfer" do there is no double charge to IHT. A chargeable transfer is generally one made to a trust.

If a gift is made but a reservation of benefit is reserved, the seven year clock does not start ticking until that reservation ends as it did in your mother's case. If she had died whilst still living in the house, then the value of the property at the time of the original gift in 1998 (GWR) would be included in her estate for IHT purposes as the reservation would not have ended before her death. As she died within seven years of the reservation of benefit ending, the value of the property at the time the reservation ended in 2005 (PET) should have been included in her estate for IHT purposes.

All of the above has no relevance for CGT purposes. You were given the property in 1998 and the value at that time (£265,000) is your and your brother's cost for CGT purposes. Take a look here for more information on the main residence and CGT.

Expert:  TonyTax replied 3 years ago.

I was just reviewing this question and wanted to make a further point.

In your question 3 you asked "If GWR was not exempt from IHT (regardless of seven year rule), then should the property not be assessed under the Estate as opposed to CGT? Otherwise I do not see why Gifting property to children would be beneficial. I appreciate that my name is XXXXX XXXXX title."

Normally, when someone dies, all their assets are valued at the time of death for IHT purposes. Those values then become the cost values for the beneficiaries of the estate. So, if a house was worth £200,000 at death, the cost for the inheritor would be £200,000.

The value included in the esate can change where gifts are made in the lifetime of the donor but a reservation of benefit is reserved as I explained in my last post and that can be higher than the value when the gift was made. The cost to the gift recipient will always be the value of the gift at the time the gift is made. This can result in an element of double taxation but the rules are there to penalise "false gifts" which is what GWR's are.

The IHT situation for your late mother is not related to your personal CGT position which is what your original question was about. Some estates are not large enough to pay IHT, some are. Your personal tax position is not influenced by whether an estate pays IHT or not.

Customer: replied 3 years ago.

Thank you.


I am becoming clearer on the issue. However, I know that not everything is black and white with HMRC and I am trying to confirm some of the key points.


 


This is the first time I have used this service, and I have to rely on your expertise. Initially, when I posed the question I thought I was signing up to an ex-HMRC senior officer with over 5,000 satisfied clients. This, in itself gives me some method of measuring the weight that I can place on the answer.


 


Your CV did not have quite the same clout, as I am sure you will recognise. Perhaps if you gave me a little more detail on your track record, I can move forward to providing a rating. Please be clear that I am not questioning your ability or the professional way in which you have approached my query but if I am to accept your opinion I need to know how informed it is.


 


Regards

Expert:  TonyTax replied 3 years ago.

I've been in tax for 30 years, passed a tax exam in 1991, have never worked for HMRC and I know what I'm talking about. There are many former tax officials who know very little as they are pigeonholed in HMRC. I have a far greater breadth of experience than most tax inspectors of which there are very few left in HMRC with long term experience. You will find very few people working for HMRC these days who know much about tax. It's now just a glorified call centre, hence all the recent bad publicity and foul ups.

I have over 6,500 acceptances on the www.justanswer.com site for which I've been working since late 2008. This is the www.justanswer.co.uk site, a recent spin off. Click on my name and look at my ratings on the right. The uk site only shows acceptances to answers to questions placed on the UK site which is still establishing its internet presence whereas the US site has been around much longer. Some UK tax questions are still posted on the US site by UK customers as they find that first in their search engine.

This is a very straightforward question to me. There is nothing difficult in your questions to a tax professional. To a lay person, however, the topic is probably a minefield. My answers to all your questions are correct

Customer: replied 3 years ago.

Thank you. The website doesn't do you any favours as it only says 140 or so clients.


I will check your profile as you suggest.


 


One final question though: -


 


Does the fact that I operated as a Carer for my mother in an enforced situation mean that I might have some scope to claim 'absence for any reason' from my family home to allow me to classify my mother's home as my main home at that time? I did not elect or nominate a main home in 1998 (GWR date) as I had no idea what was in the future. My mother's home was in my name (and my brother's) only, although the family home was in joint names with my husband.


 


Regards

Expert:  TonyTax replied 3 years ago.

It says 140 because that is how many answers I have had accepted on the UK Tax site in the few months of its existence. As I said, the UK Tax site is new. I have over 6,500 acceptances on the UK Tax part of the US site where most of the UK Tax customers still post their questions.

The "absence for any reason exemption applies to absences from your family home, not the property that your mother lived in.

I will find out from just answer how you can see my profile on the UK Tax section of the main US site.

Customer: replied 3 years ago.

I am still waiting to view bona fides.


I have repeatedly emailed the US JustAnswer Client Services (Dianne) but they only refer me to the UK website and do not seem to understand that I need the confidence of a track record to be able to judge the quality of the Advice. I have no other way of rating it.


 


I do not want this to drag on. Can you help to move this forward, please.


 


Regards.


 

Expert:  TonyTax replied 3 years ago.
Leave this with me and I will ask JA to send you a link to my US site record.
Expert:  TonyTax replied 3 years ago.

Hi again.

Click here to see my profile for the UK Tax section of the US justanswer.com site.

Expert:  TonyTax replied 3 years ago.

Apparently, you have rated my answer as bad or poor though I cannot see it on any of my posts.

Frankly, I'm leaving this as is and not asking you to reconsider your rating or even to do me the courtesy of telling me what is wrong with my answer as I've spent too much time on it as it is. However, I'd ask you to come back and let me know when you've had what I have said verified by somebody else. My answer was supported by another expert and is 100% correct.

 

Click on TonyTax to see my ratings. I may not have a Degree but I know my tax from 30 years of experience. I've answered many questions similar to yours on this site.

Customer: replied 3 years ago.

I appreciate your concern, but my rating stands.


I made it on the basis of the handling of the issue by JustAnswer's customer help, as well as your answers.


 


You may not have been aware that I was communicating heavily with JustAnswer by email as I was concerned at the unilateral change of expert made by the site, particularly as your visible CV on the UK site was not comprehensive and did not provide me with confidence. I did also raise the issue with you, but spent a considerable amount of my time in achieving clarification - 5/6 emails and abortive websearches on the .com site. When I did receive your .com profile, I see that more than 50% of your clients returned an unfavourable response and I would not have gone forward had I known that at the outset.


 


Your answers were technically correct - not surprising when you provided numerous links to the HMRC website for me to read. I had already seen all these - they are simple factual rules. What I was seeking was a more nuanced view of the matter and the attitude of HMRC to certain issues, which is why my initial selection was to an expert with working knowledge of HMRC. I do not believe I got that from your response.


 


I hope this clarifies my position.


 


Regards

Expert:  TonyTax replied 3 years ago.

It clarifies the position but I'm not responsible for justanswer's handling of your queries. You have to remember that the company is based in San Francisco so there is a time difference.

I don't rely on HMRC documents for my answers. I use them as backup. Frankly, I'm insulted by the lack of respect shown to my experience and being given a poor rating for a correct answer. You are supposed to rate the answer, not the administration department's response to your queries. I answered all your questions with facts based on my experience.

You asked several times about the main residence exemption and I informed you that I doubted that HMRC would allow it for the time you spent at your mother's home and the reason for that. The tax system is not customisable to your or any other taxpayer's requirements unfortunately.

Poor ratings reflect badly on my status on this site so I'm not happy with the one you have given (one of a very small number of similar ratings I might add) and the spurious reasons for it. Still, one cannot please everyone, I'm happy with my answers to your questions and so are around 6,700 other JA customers.

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