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Sam
Sam, Accountant
Category: Tax
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Experience:  26 HMRC expertise, PAYE, Self Assessment ,Residency, Rental Income, Capital Gains, CIS ask for Sam Tax
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My husband owns a detached house in South London and wants to gift it to my son. What is t

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My husband owns a detached house in South London and wants to gift it to my son. What is the CGT situation, if the house was held jointly in 3 names (my husband, his mother and his brother) since 1969, bought at £7,300. In 2013 the house was put in my husband's sole name after his mother died and both his mother's share and his brother's share was agreed to go to my husband.
Many thanks
Christina
Submitted: 1 year ago.
Category: Tax
Expert:  bigduckontax replied 1 year ago.
Hello Christina, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question. A gift of this nature counts as a disposal of this property. It will create a Potentially Exempt Transfer (PET) in your husband's Inheritance Tax (IHT) affairs. PETs run off at a taper over seven years and in the event of your husband's decease within that time frame are added back to his estate for IHT purposes. PETs are the first to suffer tax and if the deceased's estate is insufficient to meet the tax on the PRT then the liability cascades down to the beneficiary for immediate payment. The classic solution is a reducing term life insurance to protect the tax on the PET. IHT is at a fixed rate of 40% on estates over 325K. This 325K is inflated by any inter spousal or charitable bequests. If this house is his sole or main domestic residence the Private Residence Relief (PRR) applies and relieves any gain on disposal at 100%. If, however, this is not the case then your husband will be liable to CGT on any gain made on disposal. He will have an Annual Exempt Amount, currently 11.1K to offset any gain and if the property was let out and at some time he lived in the property then he could be entitled to Lettings Relief (LR) up to 40K also. The calculation of CGT can be very complex and without more data cannot be achieved. I do hope that my answer has been of assistance.
Customer: replied 1 year ago.

Hello

Thanks for your answer. I know all the facts that you have outlined from my own research. However, we require a specific answer to this specific situation, which is abit more complex. i.e. the house was in 3 joint names and my husband only had 1/3 in the house between his brother and mother, see above. It is not his PPR. If the house was valued at £390,000 at the time his mother died, and it is now valued at £500,000 what would be the CGT of disposal.

Expert:  bigduckontax replied 1 year ago.
500K - 390K = 110K gain.
Divide by 3 gives say 37K each.
Deduct 11.1K leaves say 25.6K liable to CGT; worst case scenario is a tax bill of just over 7K each.
But soft, if the property was let out and any of the participants lived in it before or after the letting then Lettings Relief (LR) would be available up to a maximum of 40K depending on the level of rents received. LR might reduce liability to zero, but seems unlikely in this case.
Customer: replied 1 year ago.

Hello

I think your answer of '37K each' is is wrong, considering that one owner has died and that the property is 100% in my husband's name. Please read my original email.

Expert:  bigduckontax replied 1 year ago.
In that case there is a 110K gain, less 11.1 = say ppK, worst case tax say 28K.
Customer: replied 1 year ago.

I think you are missing something here. My husband owned 1/3 of property since 1969, not since 2013.

Expert:  bigduckontax replied 1 year ago.
The original question concerned the taxation effects of his gifting the house. Then the seven year rule kicks in. If he survives seven years after the gift then that is an end to it.
Customer: replied 1 year ago.

We are not asking about IHT, and are aware of IHT, but my original question is only about CGT on him gifting the house. He has owned 1/3 of the house since 1969, surely this needs to be taken into account when calculating gain subject to CGT?? You only referred to 2013 property value in your reply.

Expert:  bigduckontax replied 1 year ago.
Because the change amounted to a disposal for CGT so the clock starts again. Gifts and PETs are part of the IHT regime.
Customer: replied 1 year ago.

I am not sure what you mean by 'change'. Can you explain fully?

Expert:  bigduckontax replied 1 year ago.
The 2013 was a change year for CGT.
Customer: replied 1 year ago.

??

Expert:  bigduckontax replied 1 year ago.
This is what your original question said: ' In 2013 the house was put in my husband's sole name after his mother died and both his mother's share and his brother's share was agreed to go to my husband. '
Customer: replied 1 year ago.

Yes, true for 2/3 of the property, 2013 is a baseline. But his 1/3 of the house share was not affected by what happened in 2013, as he acquired it in 1969, so should not the gain on this 1/3 be dated back to the date he acquired it at (1969)?

Expert:  bigduckontax replied 1 year ago.
Sorry, but I think you will find that 2013 counted as a disposal for the UK CGT regime.
Customer: replied 1 year ago.

What is the regime?

Expert:  bigduckontax replied 1 year ago.
The UK Capital Gains Tax regime.
Customer: replied 1 year ago.

I gather that, can you explain why 2013 would coulnt as the disposal date.

Expert:  bigduckontax replied 1 year ago.
Not the disposal date, a disposal date.
Customer: replied 1 year ago.

What is the difference?

Expert:  bigduckontax replied 1 year ago.
2013 is the last didpodal date from which the gain calculation will run.
Customer: replied 1 year ago.

If my son has been living in the property since 2013 paying a rent, how will this affect the £110K liable to CGT?

Expert:  bigduckontax replied 1 year ago.

Please read what I said in my original answer viz: 'if the property was let out and at some time he lived in the property then he could be entitled to Lettings Relief (LR) up to 40K also'

Customer: replied 1 year ago.

Yes, we noted that, what do you need to know to advise us how much the property relief would be in this case.

Expert:  bigduckontax replied 1 year ago.
I cannot tell you, it depends upon the quantum of rental received up to 40K.
Customer: replied 1 year ago.

What information do you need from us to answer this question? We are not impressed with you drip feeding information like this.

Expert:  Sam replied 1 year ago.
Hi
I would be more than happy to provide a full answer if you would like, as I see this expert has opted out from assisting you, however I do not want to tread on anyones toes in assisting you.
May I proceed?
Thanks
Sam
Customer: replied 1 year ago.

Hi Sam,

Thanks for your assistance. Please proceed.

Expert:  Sam replied 1 year ago.
The gain is treated as having accrued over the whole period of ownership, although this time is divided into two occasions the time when just a third was owned from 1969 to 2013 and then from 2013 to 2015 (date) when 100% ownership.
As this has never been your husbands main residence then there is no private residence relief due in his share – and as there is no private residence relief, there cannot be any entitlement to private lettings relief, so the gain is calculated as follows (and to simplify matters I have calculated this on years rather than months)
So the property was purchased in 1969 and we are now in 2015 – but due to rebasing in 1982 – you would need to establish the value at this date (1982) which in turn would alter the ownership period from 1982 to 2015 a total of 33 years to take the higher value of the property into account. Your local estate agent should be able to help with this or the district valuer (let me know if you need more details on the district valuer)
But using the figures we do have – a purchase value of £7300 and a current value of £500,000
So a gain of £492700
For 33 of those 35 years only one third was your husbands, and for the later 2 years 100% ownership so
1/3rd share 33/35 x £492700 = £464545 x 1/3rd = £154848
And for 2 of the 35 years – a 100% ownership
So 2/35 x £492700 = £28154
So a total gain of £183002 to consider (which will be less once the 1982 value of the property has been established) of which the first £11,100 is capital gain free (as this is the annual exemption allowance for the year) and then the remaining gain (at this stage £171,902 liable to capital gains tax.
If your husband is a higher rate taxpayer then all this gain will be liable to 28% rate = £48132.56 but if his annual income is less than £42,385 then some of this gain will be liable to 18% (up to unused basic rate band) and the reminder at 28%
Depending on how you wished and also when you wished to proceed it could be prudent that a half share be transferred into your name this tax year (which would be a NIL capital gain position as a spousal transfer) which would benefit you a further annual exemption (worth £11,1000 x 28% = £3108 but compared to the legal costs to transfer might not actually assist with any savings but then if you are a basic rate taxpayer then further savings on some of the capital gain rate up to your unused basic rate band – I can advise further if you could provide your annual income figure )
Do let me know if I can be of any further assistance – and I do apologise for the confusion you experienced initially
Thanks
Sam
Customer: replied 1 year ago.

Many thanks for this clear explanation. Please could we have a similar CGT gain calculation explanation assuming that the 1982 value of the property was 60000?

Expert:  Sam replied 1 year ago.
Hi
Of course you can
So the new 1982 approx value of £60,000 and a current value of £500,000
So a gain of £440,000
For 33 of those 35 years only one third was your husbands, and for the later 2 years 100% ownership so
1/3rd share 33/35 x £440,000 = £414857 x 1/3rd = £138285
And for 2 of the 35 years – a 100% ownership
So 2/35 x £440,000 = £25142
So a total gain of £163,427 less £11,100 annual exemption - leaves £152327 liable to capital gains tax - and if a higher rate taxpayer then x 28% = £42651.56
Do let me know if I can assist furtehr but it would be appreciated that when you come to rate (accept) that it would be appreciated that you do so, using the service I have provided you with
Thanks
Sam
Customer: replied 1 year ago.

Thanks, ***** ***** not be:

'For 31 of those 33 years only one third was your husbands, and for the later 2 years 100% ownership so...'

instead of:

'For 33 of those 35 years only one third was your husbands, and for the later 2 years 100% ownership so...'

Expert:  Sam replied 1 year ago.
Hi
You are absolutely correct - I apologise
The second revised calculation is
So the new 1982 approx value of £60,000 and a current value of £500,000
So a gain of £440,000
For 31 of those 33 years only one third was your husbands, and for the later 2 years 100% ownership so
1/3rd share 31/33 x £440,000 = £413333 x 1/3rd = £137,777
So 2/33 x £440,000 = £26667
So a total gain of £164,444 less £11,100 annual exemption - leaves £153,344 liable to capital gains tax - and if a higher rate taxpayer then x 28% = £42936.32
Thanks
Sam
Customer: replied 1 year ago.

Thanks for this, it is very useful. Are you able to advise what type of valuation is required to establish the current value and the 1982 value of the property, so that it would be acceptable to HMRC. We would prefer to do it without incurring surveyer's fee if possible, and to value the property as low as possible! (the figures given for calculations were broad estimates)

Expert:  Sam replied 1 year ago.
Hi
if you use local estate agents then ask two of them to provide a pre valuation OR you can use just the district valuer - link here for their details
https://www.gov.uk/government/organisations/district-valuer-services-dvs
They will value based on what they were for the area and that street at that time, so will all provide much of a muchness in their analysis (and you actually want it to be as high as possible to lessen the gap between the value now and the value then - as this will create a smaller gain!)
There are sites such as Zoopla but these are not reliable and really just provide generic valuations, which do not reflect the actual property but the area/street itself which could have a mix of property sizes and style!
Thanks
Sam
Sam, Accountant
Category: Tax
Satisfied Customers: 13862
Experience: 26 HMRC expertise, PAYE, Self Assessment ,Residency, Rental Income, Capital Gains, CIS ask for Sam Tax
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