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bigduckontax
bigduckontax, Accountant
Category: Tax
Satisfied Customers: 4199
Experience:  FCCA FCMA CGMA ACIS
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My mother bought a house but in her sons name and continued

Customer Question

My mother bought a house but in her sons name and continued to live in it not paying him rent, she then went in to a care home and received the rent herself. We are now told that not only will the house be up for inheritance tax which is fine but also my brother will be paying capital gains tax on it. Also we are told he should have declared the rent on his tax return as well as her. She has declared it but not him.
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
Hello, I am Keith, one of the experts on Just Answer, and happy to be able to help you with your question. This is a gift by your mother to her son. Gifts create a Potentially Exempt Transfer (PET) in a persons Inheritance Tax (IHT) position. PETs run off at a taper over seven years and in the event of the donor's demise within this period are added back to their estate for IHT purposes. PETs are the first to suffer IHT and if the donor's estate is insufficient to meet the tax on the PEt it cascades down to the beneficiary for immediate settlement. In this case though, as your mother continued in residence it is a gift with reservation and the time on the seven year clock does not start until her vacation. Now as to the rental your question is a tad confusing. You say your mother did not pay rent to her son. Yet when she went into a care home 'she received the rent herself;' what rent? Once this point is clarified we can move forward.
Customer: replied 2 years ago.

The house was let and she maintained the rent as income for herself and therefore the income from the house was declared on her tax return and she pad income tax on it.

Expert:  bigduckontax replied 2 years ago.
He should have declared it and she should not. In effect he was making a gift to her.
Customer: replied 2 years ago.

So what do we do now if the wrong person has declared it ? Also will capital gains be payable as well upon the house sale as and when ?

Expert:  bigduckontax replied 2 years ago.

Both write to HMRC to their respective offices explaining the error. There should be no penalties imposed as there has been no loss of Revenue.

I have explained the IHT position in my original response. The situation there is in the seven year time zone. If she survives that long then there will be no add back to her IHT account, or it may be tapered if she passes on earlier.

On sale there may well be a CGT bill on any gain made. The gain is the difference between acquisition and disposal price. The latter is the net sales price whilst the former is the purchase price plus purchase costs plus any improvements made to the property. There is an Annual Exempt Amount of 11.1K to offset this and as the property has been let Lettings Relief may be available up to 40K in place of the AEA, but only if the owner, your son, has lived in the house before the letting started.

bigduckontax and other Tax Specialists are ready to help you
Customer: replied 2 years ago.

Many thanks

Expert:  bigduckontax replied 2 years ago.
Delighted to have been of assistance.
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Expert:  bigduckontax replied 2 years ago.
Thank you for your support.