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TonyTax
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15940
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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A friends mother signed her house over to my friend and her

Resolved Question:

A friend's mother signed her house over to my friend and her sister in 2007. No valuation of the house was done at this time. she continued to live in the house until she went into care early in 2014. The house was sold in Jan 2014 in order to pay for the mother's care home fees. The proceeds were split between the two sisters. My question is:

1. Are there any inheritance tax implications?
2. Will there be any capital gains tax to pay if the house has increased in value between 2007 and 2014?

Many thanks for your help
Submitted: 3 years ago.
Category: Tax
Expert:  TonyTax replied 3 years ago.
Hi.

I'm drafting an answer now. There is a fair amount to get through so please bear with me.
Expert:  TonyTax replied 3 years ago.
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 and 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.
Expert:  TonyTax replied 3 years ago.
I have to go out for a while but will be back in an hour or so to answer any follow up questions that you may have.
Customer: replied 3 years ago.

Thank you - that is what I thought but it is good to have a second opinion. Just for further clarification:


 


Does it make no difference if the proceeds from the house sale is used for her mother's care fees?


 


No valuation was done on the house in 2007 - would she need to get a professional valuation on this?

Expert:  TonyTax replied 3 years ago.

I'm afraid that the fact that the monies raised from the sale of the house are being used to pay care fees has no effect on the tax situation.

Your friend will need to try to get a professional valuation of the house in 2007 so that any gain can be calculated. The tax office may ask the District Valuer to check the valuation used.

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