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bigduckontax, Accountant
Category: Tax
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I currently own a house outright, which I live in with my elderly

Customer Question

I currently own a house outright, which I live in with my elderly mother. In June I will be marrying my partner, and moving into his rented accommodation.

My mother will remain as a resident in my house, but will not be paying me anything to live there.

I understand that there may be implications with capital gains tax, but am not sure how this works, what the implications may be, and what/when any applicable taxes would come into play.

Any advice gratefully received.
Submitted: 3 years ago.
Category: Tax
Expert:  bigduckontax replied 3 years ago.
Hello, I'm Keith and happy to help you with your question.

As you will not be living in your sole or main domestic residence the Capital Gains Tax (CGT) clock does begin to tick. Let us suppose that in a few years time your mother passes on and you decide to sell. Take the selling price less costs of sale. Take the purchase price plus buying costs, add to then any improvements (eg new kitchen, new bathroom) but not routine maintenance or redecoration. The difference between the two is your capital gain.

Now calculate the total ownership time in months. Calculate the time in months that you were not in occupation and knock off a further 18. This figure over the total ownership multiplied by the gain gives that element subject to CGT. There is an Annual Exempt Allowance of 11K to be deducted and the balance is taxed at 18% or 28% depending on your income in the year of disposal. As your mother did not pay rent you have no entitlement to Lettings Relief.

Here is an appropriate extract from an informed source:

'Michael Garvey, of Edinburgh Wealth Management says:

There is a longstanding tax concession where property freely rented to a dependent relative can be exempted from capital gains tax when you come to sell it.

But this applies only to property that you owned, and was occupied by the relative, before April 6, 1988. If these conditions are not met, the property is taxed like any second home or buy-to-let investment.
This means any expenses associated with buying and selling the property can be deducted from your sale profits. Likewise, you can make allowance for improvements to the property, such as a new kitchen. And you may offset any capital losses in the same tax year or carried forward from previous years.

Any chargeable gain in excess of your annual exempt amount will be taxed at 18 per cent if the gain, when added to your income, remains within the basic-rate income tax band. Any gain exceeding this will be taxed at 28 per cent.

Read more: http://www.thisismoney.co.uk/money/experts/article-2099801/My-mum-lives-house-rent-free--I-pay-capital-gains-tax-I-sell.html#ixzz31ivFNCVU

So there is a loophole, the key date is 5 April 1988. The other loophole is to move back in on your mother's cessation of her tenancy. General experts' opinion is that this reoccupation must last at least a year.

I do hope I have been able to throw some light on CGT which can creep up on one in totally unexpected ways.
Customer: replied 3 years ago.
Hi Keith,

Many thanks for the rapid response.

The house was originally purchased by my mother many, many years ago, and the deeds were transferred to me (with no charge) in 2000.

Would the CGT be calculated between the value she originally paid, and the vale of the sale (less costs)?
Expert:  bigduckontax replied 3 years ago.
The purchase price for CGT would be the value at 2000 when it was transferred to you. You probably don't have that. A way round, as advised to me by an old Chartered Surveyor friend who has just had to do such a valuation is to seek an indication of similar house prices from the local newspaper's archives. In his case it was the South London Press.

It looks to me as if your mother may have been in occupation in 1988. This is, as you can see, a very advantageous loophole to escape CGT, that very nasty tax.
Customer: replied 3 years ago.
Hi Keith,

Many thanks... yes, mum was resident and owned the property many years before 1988 so would the 1988 loophole still apply, even though the deed has been transferred to me in 2000?
Expert:  bigduckontax replied 3 years ago.

It would appear so. Note the wording 'and was occupied by the relative, before April 6, 1988.' I would be inclined to emulate Brer Fox 'For he law low and say nuffin' in the event of any enquiry stonewalling any approach with the information that your Mother was in occupation before 1988. There must be very few of those properties about now. Mark you I have been in occupation of my house since 1976!

 

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Expert:  bigduckontax replied 3 years ago.
Thank you for your support.