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TonyTax
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15915
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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My brother and I own the house my father lives in. He has dementia

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My brother and I own the house my father lives in. He has dementia so we are selling the house and moving him in to a more suitable warden assisted flat. There is £120k left over split 50/50 with my brother. We each intend to put the £60k in some kind of savings plan to pay for any future care our father needs. Will we have to pay any tax such as CGT on the £60k
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.
Hi.

Can you tell me how you came to acquire the house that your father currently lives in please. I may need more information and that will depend on your response to this post.
Customer: replied 2 years ago.

When my father was diagnosed with dementia it was quite advanced. he quickly became unable to deal with his own finances so we went to a solicitor who arranged for us to have Power of Attorney. (That was about 5 years ago). Then 2 years ago with my fathers agreement the house was signed over to my brother and I as it made it much simpler for us to deal with things like insurance and utilities. as part of the transfer my father was given guaranteed residence at the property and could not move without his consent. as his condition has deteriorated he needs to move and has given his consent hence the house being sold to pay for a warden assisted retirement flat which again my brother and i will own using the money from the house sale.

Expert:  TonyTax replied 2 years ago.
Thanks.

Leave this with me while I draft my answer. There is a fair amount to get through so please bear with me.
Expert:  TonyTax replied 2 years ago.
Hi again.

There are two issues here. Capital Gains Tax is one and Inheritance Tax is the other.

CAPITAL GAINS TAX

If your father had retained ownership of the house and it was sold to pay for his care home fees, there would be no CGT liability for him assuming that he had lived in it for the whole period of his ownership. In addition, a maximum of the last 18 months of ownership would be given as a tax free period if he moved out before the house was sold.

Assuming that you and your brother are the owners and that you are not simply holding it for your father because of his poor health, then you and your brother may have CGT to pay. You will be deemed to have acquired the house at the date it was put into your names and your "cost" for CGT purposes will be its value at that time which you say was two years ago. If the property is sold for more than it was worth two years ago, you will each have a gain of half the difference between the value two years ago and the net of sale expenses disposal proceeds.

The first £11,000 of your respective shares of the gain will be exempt from CGT assuming you have no other gains in the tax year the house is sold and the balance will be charged to CGT at 18% or 28% depending on the sum of your respective incomes and your respective shares of the gain in the tax year of disposal. What you do with the money will have no influence on the CGT situation I'm afraid.

INHERITANCE TAX

When your father gave you and your brother the house, he made a gift to you. However, as he retained the right to live in the house it was a gift with reservation of benefit unless he paid a full market rent to you and your brother. Take a look at the notes here and here for more information.

In practical terms, this means that the house remains as part of his estate for Inheritance Tax purposes for as long as he continues to reserve the right to live in the house notwithstanding the fact that you and your brother own it. As the house disposal money will be used to buy another property for your father to live in, the reservation will continue until your father moves out which is unlikely to happen or he passes away. If the reservation of benefit is still in place when he dies, then the value of the flat and the cash left over from the house disposal at that time will be included in his estate for Inheritance Tax purposes.

At present levels, the first £325,000 of an individual's estate is exempt from IHT when they die. This can be increased if the deceased was a widow or a widower and their executors apply for any unused part of their late spouse's nil-rate IHT band to be transferred to the spouse who passes away later. You can read more about that here.

PRE-OWNED ASSET TAX

There is the possibility of a charge on your father under the pre-owned assets tax rules which you can read about here and here. This may be negated by the fact that when the house was given to you, your father retained the right to live there which makes it a gift with reservation. As he is about to move, it could be argued that he has retained the right to continue to live in a property provided by you with the disposal proceeds of the house but to take a belt and braces approach, you might consider making the election for the gift with reservation rules to apply to avoid a POAT charge especially if his estate won't be liable to Inheritance Tax..

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

Hi. Will the response come through tonight or in the next couple of days as if not tonight I will log off and look tomorrow

Expert:  TonyTax replied 2 years ago.
Hi.

I just posted my answer before your post came through.
Customer: replied 2 years ago.

Hi. The house is being sold for £220k of which £100k is being spent on the flat. Over the last 2 years the house has probably depreciated in value as basically everything is wearing out and needs refurbishing. Also we have the solicitors fees for the sale and purchase of about £2000 which my brother and i are paying as it is our house. So on that basis it looks like there is probably no CGT risk if I have understood correctly. My fathers savings only amount to £3k so we are well below the inheritance tax threshold.

Expert:  TonyTax replied 2 years ago.
You can only claim for the cost of any improvements you make to the house, not general repair and maintenance costs. If you intend to sell the property at a value which allows the buyer to refurbish it, then that's fine. A house is only worth what somebody is prepared to pay for it.

It seems like your father is nowhere near the IHT thrsehold which is good news.
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