Hi again.INHERITANCE TAX
Since your friend's mother continued to live in the house after she gifted it away, the gift is "a gift with reservation of benefit". That means that it remains as part of the donor's estate for Inheritance Tax purposes until the donor either dies, stops living in the property or pays a market rent to the owner(s). You can read about gifts with reservation of benefit here
At the point in 2014 that your friend's mother stopped living in the house, the seven year clock started to tick. If your friend's mother lives for at least seven years from the date she moved into the care home, then the value of the house at the time she moved out which is now a potentially exempt transfer will not form part of her estate for Inheritance Tax purposes. If, however, she dies within seven years of making the gift (in early 2014), then the value of the property at that time will form part of her estate for Inheritance Tax purposes. As you will see under the heading "Applying ‘Taper Relief’ to gifts" here
, the longer a donor lives after making a gift, the better as after three years, the IHT exposure starts to reduce. You might also read about transferring an unused IHT threshold here
It is possible to take out a term assurance policy to protect against a potential Inheritance Tax liability.CAPITAL GAINS TAX
For CGT purposes, your friend and her sister acquired the house in 2007. The value of the property at that time is their "cost" for CGT purposes. Assuming that the property was sold in 2014 for more than it was worth in 2007 which is very likely to be the case, they may have CGT to pay. If either of them lived in the property during their ownership of it, they will qualify for some main residence relief to reduce their respective shares of the taxable gain. If not, then they will have to pay CGT on the excess of the gain over the annual CGT exemption of £11,000 which they will each be entitled to.
There are two rates of Capital Gains Tax, 18% and 28%. The rate or combination of rates that will apply is dependent on the income level in the tax year the individual made the gain. As the property was sold in the 2013/14 tax year, one of the following scenarios will apply to each of your friend and her sister:
1 If their respective incomes in 2013/14 including the taxable gain were £41,450 or less, then all the taxable gain will be taxed at 18%.
2 If their respective incomes in 2013/14 excluding the taxable gain were more than £41,450, then all the taxable gain will be taxed at 28%.
3 If their respective incomes in 2013/14 excluding the taxable gain were less than £41,450 but more than £41,450 when the taxable gain is added, then part of it will be taxed at 18% and part at 28%.
I hope this helps but let me know if you have any further questions.