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Sam
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Category: Tax
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In 1995 my father signed his house over to me. He has continued

Customer Question

In 1995 my father signed his house over to me. He has continued to live in the house ever since. Now I want to sell the house and relocate my father in a bungalow to be bought in a different part of the country where my wife, father and myself will be living together. He is nearly 90 and we plan on living together to look after him.
I have a 3 houses in joint names with my wife, two properties are rented out and one is my permanent address, all are on interest only mortgages. We are both retired, I am 62 and my wife is 61 no state pensions as yet. How much capital gains tax will I have to pay on the sale of the house that my father lives in? It is valued at £155K and there was no transfer of funds in 1995. The tax amount could make a big difference to our plans as we want to buy a bungalow big enough for us to have our own space.
Submitted: 2 years ago.
Category: Tax
Expert:  Sam replied 2 years ago.
Hi

Thanks for your question

Although there were no transfer of funds with this property in 1995, the value needs to be established so the capital gains can be calculated.

Please could you also advise whether you father paid you market value rents (as there is also the issue of pre owned asset tax and future Inheritance tax for your father)
Please also advise the annual income of you and your wife.

Thanks

Sam
Customer: replied 2 years ago.


No rent paid by father.


 


My wife and myself do not work. We clear £300 per month on rental properties only and I get £100 private pension per month. We are living on savings. We do a self assessment yearly.


 


Is capital gains tax due only on the value of the property in 1995 and present day valuation, or the whole amount?


 


Thanks

Expert:  Sam replied 2 years ago.
Hi

Thanks for your response

As you father pays no rent but still gets to enjoy the benefit of a property he gifted to you, you should be aware that the value of this property will still be included for Inheritance tax purposes on your fathers estate - as the gift is treated as one that is reservation with benefits - rather than a potentially exempt transfer.
Plus your father needs to be aware of an annual consideration for pre owned asset tax. This is where a property has been gifted/transferred but is still made use of.
The link below re pre owned asset tax will help you establish whether your father has any consideration for the annual pre owned asset tax.


I have added a link here that advises more on both - read "Giving your home away and continuing to live in it and no rental income paid http://www.hmrc.gov.uk/inheritancetax/pass-money-property/pass-home-to-children.htm#3

And here regarding the pre owned asset tax which explains the principal around the charge http://www.hmrc.gov.uk/manuals/ihtmanual/ihtm44001.htm
And here when and how the charge arises.
http://www.hmrc.gov.uk/poa/poa_liable.htm

Then as the home has been transferred into your sole name then the capital gain will be the value at the date of sale, less the 1995 value, this will form the initial capital gain.
From this initial capital gain you can deduct the costs to sell 9so legal fees and estate agent fees) and also the costs for any major renovations, such as new bathroom, new kitchen etc

Then with the figure left - the first £10,900 (annual exemption allowance for 2013/2014, which increases to £11,100 from 2014/2015) is tax free, and the remaining gain is liable to capital gains tax.

The rate at which capital gains is paid, will be a mix of 18% and 28%
Any unused basic rate band can allow the equivalent of that amount for form an 18% charge, with any remaining gain at 28%.
For example - annual income £17,000 - as the cu7rrent basic rate band ends at £42,475 and £17,000 would have been used - this would leave £25,475
So the first £25,475 of the gain (after all the deductions and annual exemption) would be charged at 18% and the remaining gain at 28%


Thanks

Sam
Customer: replied 2 years ago.


Many thanks for your help.

Expert:  Sam replied 2 years ago.

Hi You are very welcome and I hope that the position has not caused further cause for concern, as pre owned asset tax and the inheritance tax position is not always fully understood when transfers of main residences are made, and I hate to be the bringer of bad news, but do need to make sure you are fully aware of the whole position.

 

. Thanks Sam

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