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TonyTax
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15917
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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My two sons inherited a house from their mother in 2008 which

Resolved Question:

My two sons inherited a house from their mother in 2008 which they have been renting out whilst living with me their Dad.mnow they are older, one son wishes to relinquish his half share to his brother, whilst the other son wishes to live in the house as sole owner and occupier for the foreseeable future when the tenancy ends next month. What is the potential CGT exposure of both my sones?
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.

Hi.

The cost of the property for CGT purposes is the value of the property when your sons inherited it from their mother, the probate value. That will be split between them equally.

If one of your sons sells his half to his brother, the sale will be deemed to have occurred at the open market value which may give rise to a gain for the selling brother. If the sale occurs in the current tax year, 2015/16, the first £11,100 of the gain will be exempt from CGT.

There are two rates of CGT, 18% and 28%. The rate or combination of rates that the selling son will pay will be dependent on the level of his income in the tax year that the property is disposed of. Assuming that occurs in 2015/16, one of the following scenarios will apply:

1 If the sum of the selling son's income and the net taxable gain in 2015/16 is £42,385 or less, then all the taxable gain will be charged to CGT at 18%.

2 If the selling son's income alone in 2015/16 is £42,385 or more in 2015/16, then all the taxable gain will be charged to CGT at 28%.

3 If the selling son's income alone in 2015/16 is less than £42,385 but greater than £42,385 when the net taxable gain is added, then part of the net taxable gain will be charged to CGT at 18% and part at 28%.

All the above assumes that the property has not been the main home of the selling son during his part ownership of it.

As for the buying son, the property will become his main home and on a future disposal he will be entitled to some main residence relief and letting relief which you can read about in HS283 here.
I hope this helps but let me know if you have any further questions.

Customer: replied 2 years ago.
I am a little worried about the potential exposure of the son who intends to live there and HS283 does not really cover the rather unusual circumstances. Can you please illustrate his likely exposure if I give you some actual and hypothetical numbers. Both sons inherited equally at probate a house valued at £k175. It is now valued at £k250. If the son moving in then becomes 100 percent owner and lives in it for say 7 years meaning it has been let for 7 years and owner occupied for a further 7 years, and he then sells it in 2022 for, say £350k, what is the likely CGT exposure for them. Thry both earn around £20k a year and have no other income sources. I think an illustration with actual figures would help me get my head around this.
Expert:  TonyTax replied 2 years ago.
I'll do some calculations and get back to you in a bit.
Expert:  TonyTax replied 2 years ago.
SON SELLING HIS 50% SHARE

Gain £37,500 (£125,000 - £87,500)

Net Taxable Gain £26,400 (£37,500 - £11,100 annual CGT exemption)

CGT £5,153.50 (£22,385 @ 18% + £4,015 @ 28%)

BUYING SON SELLING FOR £350,000

Gain £137,500 (£350,000 - £87,500 - £125,000)

Exempt gain due to main residence relief and last 18 months relief £83,482 (£137,500 / 14 years x 8.5 years)

Non-exempt gain or Letting period gain £54,018 (£137,500 / 14 years x 5.5 years)

Letting relief £40,000 (lesser of £40,000, £83,482 and £54,018)

Taxable gain £14,018 (£54,018 - £40,000)

Net taxable gain £2,918 (£14,018 - £11,100 annual CGT exemption)

CGT at 18% £525.24

The CGT rules may be different in seven years time.
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