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TonyTax
TonyTax, Tax Consultant
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My father gifted me a property 14 yrs ago. It was worth £180000.

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My father gifted me a property 14 yrs ago. It was worth £180000. I lived in it for 10 yrs and 4 yrs ago I moved in with my husband and started renting it out. Half of the property is my brothers but he was not put on the deeds at the time. Could someone tell me the most tax efficient way of gifting him half now. The property is worth about(NNN) NNN-NNNNand has a 200000 mortgage. Options we are considering.....transferring half into his name now, selling and gifting him half now or just keeping it the same but when I die my husband gifts him half. Many thanks for your help in advance.
Submitted: 3 years ago.
Category: Tax
Expert:  TonyTax replied 3 years ago.
Hi.

Do you have any documentation that suggests that the intention was for your brother to have a half-share of the property? If so, why was it not put into joint names 14 years ago?
Customer: replied 3 years ago.
We are a very close family and trust each other. 14 yrs ago my brother was still at University but I was working. The house needed renovating so it made more sense to be in my name for loans and mortgages etc. We have both had children and are now doing our wills which is why this has come up. My brother is happy for it to stay in my name and just be put in the will but im not sure that is cost effective for him. I want him to get as much of his half as is possible. We will still rent out the property so nothing is urgent.
Expert:  TonyTax replied 3 years ago.
Thanks. Background information always helps.

Leave this with me while I do some calculations.
Customer: replied 3 years ago.
Thank you. I appreciate your help.
Expert:  TonyTax replied 3 years ago.
Hi again.

If you sell the property for £1.3 million, you will make a gain of £1.12 million. You would need to use exact numbers of months or days in your final calculations but the following will give you an idea of the CGT position:

SALE AND GIFT OF CASH

The gain for the period the property was your main home will be exempt from CGT as will the gain for the last 18 months of ownership assuming it is sold after 5 April 2014. That accounts for £920,000 (£1,120,000 / 14 years x 11.5 years). The remaining gain of £200,000 is that part of the letting period gain which is not covered by the last 18 months of ownership (£1,120,000 / 14 x 2.5).

As the property will have been both your main home and let you will be entitled to letting relief which will be the lesser of:

1 £40,000,

2 the sum of the main residence gain and the gain for the last 18 months of ownership of the property which is £920,000 and

3 the letting period gain of £200,000.

Letting relief of £40,000 will reduce the remaining gain of £200,000 to £160,000 and the deduction of the £11,000 annual CGT exemption will leave you with a taxable gain of £149,000.

There are two rates of CGT, 18% and 28%. The rate or combination of rates you will pay will be dependent on the level of your income in the tax year of disposal of the property. Assuming you sell the property in the 2014/15 tax year, the following will apply:

1 If your income in 2014/15 including the taxable gain is £41,865 or less, then all the taxable gain will be taxed at 18%.

2 If your income in 2014/15 excluding the taxable gain is more than £41,865, then all the taxable gain will be taxed at 28%.

3 If your income in 2014/15 excluding the taxable gain is less than £41,865 but more than £41,865 when you include the taxable gain, then part of it will be taxed at 18% and part at 28%.

The taxable gain would be reduced by £80,000 if you sold by 5 April 2014. For disposals by that date, the last 36 months of ownership are treated as a tax exempt period as opposed to the last 18 months for disposals after 5 April 2014.

If you gave your brother half the net sale proceeds, that would constitute a potentially exempt transfer for Inheritance Tax purposes and so long as you live for at least seven years after making the gift, its value will not form part of your estate when calculating the IHT liability.

GIFT OF 50% SHARE IN PROPERTY TO BROTHER

If you added your brother to the title deeds, effectively gifting him half the property, as well as being a gift for Inheritance Tax purposes, it would also be a disposal for CGT purposes by you of half your interest in the property with the CGT consequences outlined above but on a £560,000 gain and excluding letting relief. The exempt gain would be £460,000. The remaining gain of £100,000 would be reduced by the annual CGT exemption of £11,000 leaving a taxable gain of £89,000. Letting relief would not arise until a final disposal of the property.

There would also be stamp duty to pay if your brother took on responsibility for more than £125,000 of the mortgage but that would be unlikely to be the case I guess.

The property could be sold immediately and your brother would have no taxable gain assuming the sale was at £1.3 million since his share of the property would have a deemed cost of £650,000. You of course would have another gain of £560,000 with £460,000 being exempt from CGT. The remaining gain of £100,000 would be reduced by letting relief of £40,000 to £60,000. There would be no CGT exemption of £11,000 unless the final sale occurred in a later tax year than the tax year in which the gift of a 50% share occurred.

GIFT POST DEATH

If you leave the property to your husband, there will be no Inheritance Tax to pay. He can then give a half share to your brother which will be a disposal for CGT purposes and a gift for IHT purposes. There would be no CGT as your husband's cost for CGT purposes would be the probate value of the property. Alternatively, he could also sell it immediately for the probate value and gift half the net cash proceeds to your brother with no CGT.

I hope this helps but let me know if you have any further questions.
Customer: replied 3 years ago.
Thank you so much. That is very clear. I really appreciate your clear Answer.
Expert:  TonyTax replied 3 years ago.
Thanks.
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15841
Experience: Inc Tax, CGT, Corp Tax, IHT, VAT.
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