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TonyTax
TonyTax, Tax Consultant
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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I am asking this question a third time because I have had conflicting

Customer Question

I am asking this question a third time because I have had conflicting answers from Keith and Sam. The question is as follows: In 1968 I bought a house jointly with my father for £ 8,000. I lived in the house for the first two years and then it was let and the income declared to HMRC. My dependent parents moved into the house in March 1983. They lived rent-free and without other considerations. In April 1995 my father died and left me his share of the house in his will. My mother continued to live in the house (rent-free) until June 2013 when she moved into a residential home. I sold the house in October 2013 for £ 612,000 (after deduction of expences).

Question: will I have to pay capital gains tax - if yest how much?
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.
Hi.

Can you tell me the dates of birth of each of your parents please.
Customer: replied 2 years ago.

My fathers date of birth was 23 April 1910.


 


My mother's was 17th November 1014 - see will be a hundred this year !!

Expert:  TonyTax replied 2 years ago.
Thanks.

Leave tbis with me while I draft my answer.
Expert:  TonyTax replied 2 years ago.
Hi again.

For Capital Gains Tax purposes, any appreciation in the value of the property between the date in 1968 that you bought the property with your father and 31 March 1982 is not taxable in any event as CGT was effectively rebased from 6 April 1965 to 1 April 1982. The value of the property on 31 March 1982 is the cost of the property for CGT purposes, at least initually. When your father left you his share of the property in April 1995, its value at that time will be added to your share of the value at 31 March 1982 to arrive at your overall cost for CGT purposes.

The full rules around dependent relative start here. I won't go over the rules on the home as they have been covered by other experts and you seem to have a good understanding of those in any event. When your parents moved into the property in March 1983, your father was 72 and your mother was 68. They both, therefore, meet the definition of dependent relatives as set out here. Other criteria for the definition of a dependent relative is here. Your parents were dependent relatives before 5 April 1988 and the property was bought before that date.

As you will read here, dependent relative relief can be claimed even if one of the dependent relatives had an interest in the property. You will qualify for dependent relative relief for a percentage of the gain represented by your ownership between the date in April 1983 when your parents moved into the property and April 1995 when your father passed away, in recognition of him being a dependent relative. So, as you and your father owned the property on a 50:50 basis, you will get relief for 50% of 12 years worth of the gain made over 31.5 years of ownership between 1 April 1982 and October 2013.

As I stated earlier in this post, when you acquired your father's share of the property in April 1995, the cost of that share will be the value of it when your father passed away and this will be added to the value of half the property as at 31 March 1982 to arrive at your total cost for CGT purposes.

As for the proportion of the gain covered by the period from April 1995 to June 2013, this is problematical as you did not own all the property as at 5 April 1988 and there is an argument that relief should be restricted to 50% of the gain covered by the period April 1995 to June 2013 as represented by your ownership share at 5 April 1988. However, Section 226 (1) of Taxation of Chargeable Gains Act 1992 here states:

"Subject to subsection (3) below, this section applies to a gain accruing to an individual so far as attributable to the disposal of, or of an interest in, a dwelling-house or part of a dwelling-house which, on 5th April 1988 or at any earlier time in his period of ownership, was the sole residence of a dependent relative of the individual, provided rent-free and without any other consideration."

There is no mention in the text above that 100% of the property needs to be owned as at 5 April 1988 for 100% dependent relative relief to be due but HMRC may take the view that relief is only due on 50% of the gain. If they do, you should challenge it all the way to a tribunal, if necessary.

If HMRC allow a claim for dependent relative relief for 100% of the gain between April 1995 and June 2013 alongside the 50% claim for the period April 1983 to April 1995, that proportion of the gain for the period June 2013 to the disposal date in October 2013 will be covered by the last 36 months of ownership exemption. The proportion of the gain from April 1982 to April 1983 will be covered by letting relief.

In order to do any calculations, I would need to know the value of the property as at 31 March 1982 and April 1995.

I hope this helps but let me know if you have any further questions.
Customer: replied 2 years ago.

Many thanks


 


You are beginning to make more sense than your colleagues Keith and Sam. But how on earth can I know the value of the Property on the two dates you have stipilated ?


 


i.e 31 March 1982 and and April 1995.


 


 

Expert:  TonyTax replied 2 years ago.
I realise that's a difficult one and the property databases we have online today won't go back as far as 1982 or 1995. I can only suggest that you ask the Land Registry for details of property sales in the same area as the property you have sold. I'm not sure how amenable they will be though.

If HMRC wish to challenge a value, they ask the District Valuer to look at it. The DV has access to property transaction records going back many years. However, some advisers think that the DV errs on the side of HMRC in disputes over property valuations but I doubt that.
Customer: replied 2 years ago.

Thank you very much for your most comprehensive answer. I am very grateful. I am awaiting the retrospective evaluation of the property on those dates by the district surveyor and valuer. But in order to save time let us assume that the valuation in 1982 was £ 300,000, and in 1995 £450,000.


 


How much capital gains tax would I have to pay? and how is it calculated?


 


Many thanks again - I shall give you full marks!!.

Expert:  TonyTax replied 2 years ago.
I will get back to you a little later with my figures.
Expert:  TonyTax replied 2 years ago.

Hi again.

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. As the property was sold in the 2013/14 tax year, one of the following will apply:

1 If your income in 2013/14 including the taxable gain is £41,450 or less, then all the taxable gain will be taxed at 18%.

2 If your income in 2013/14 excluding the taxable gain is more than £41,450, then all the taxable gain will be taxed at 28%.

3 If your income in 2013/14 excluding the taxable gain is less than £41,450 but more than £41,450 when you include the taxable gain, then part of it will be taxed at 18% and part at 28%.

The total period of ownership from April 1982 to October 2013 was 378 months. The property was let from April 1982 to April 1983, a period of 12 months. The period to from April 1983 to April 1995 was 144 months and the period from April 1995 to June 2013 was 218 months. The period June 2013 to October 2013 was 4 months.

The estimated gain you made which is deemed to have accrued evenly over the entire period of ownership was £237,000 (£612,000 - £375,000). The cost figure of £375,000 is comprised of half the 31 March 1982 value of the property of £300,000 (that seems high to me given that it cost £8,000 in 1968) and half the value of the property in April 1995 when you inherited your father's share.

To be perfectly honest, having done alot of reading over the last couple of days, I'm not sure how much of the gain will qualify for dependent relative relief because you did not own the whole property as at 31 March 1988 when dependent relative relief ceased for post 31 March 1988 purchases (you acquired half the property post 31 March 1988). I have made enquiries of former colleagues including one who specialises in tax law and presents cases in the courts and hope for some news by early next week. I've been unable to find relevant case law myself.

There are three views as follows:

1 You qualify for dependent relative relief for the whole gain covered by the period the property was occupied by your parents. That covers 362 months worth of the gain. You would also get relief for the last 4 months of ownership and letting relief for the 12 months from April 1982 to April 1983. There would be no taxable gain.

2 You qualify for dependent relative relief for half the gain covered by 144 months from April 1983 to April 1995. That would be £45,143 (£237,000 / 378 x 144). You would qualify for relief for the whole gain covered by the 222 months from April 1995 to June 2013 plus the last 4 months of ownership to October 2013. That would be £139,190 (£237,000 / 378 x 222). You would also get letting relief for the 12 months from April 1982 to April 1983 which would be £7,524 (£237,000 / 378 x 12). The taxable gain would be £45,143 of which the first £10,900 will be tax free (the annual CGT exemption) leaving a net taxable gain of £34,243.

3 You qualify for dependent relative relief for half the gain covered by 366 months from April 1983 to October 2013. That would be £114,738 (£237,000 / 378 x 366 / 2). You would also get letting relief for the 12 months from April 1982 to April 1983 which would be £7,524 (£237,000 / 378 x 12). The taxable gain would be £114,738 of which the first £10,900 will be tax free (the annual CGT exemption) leaving a net taxable gain of £103,838.

I will let you know what I learn about how much of the gain will be covered by dependent relative relief and the other reliefs mentioned above and how much won't be as soon as I have had feedback. I appreciate your patience.

Expert:  TonyTax replied 2 years ago.
Hi again.

I'm just posting to let you know what responses I've had to my enquiries about your eligibility for dependent relative relief.

The consensus amongst the people I spoke to who are all former colleagues is that you will be entitled to dependent relative relief for half of most of the gain and letting relief as described in 3 of my answer in the previous post as you only had a 50% interest in the property as at 5 April 1988 which is the cut-off point. That leaves you with a net taxable gain of £103,838.

I hope this helps. Let me know if you have any further questions.

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