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TonyTax
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15950
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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If my mother inherited a property from her husband (my father)

Customer Question

If my mother inherited a property from her husband (my father) in 1972 and is still alive, what is the most tax efficient way of passing the property down? Would it be best for her to gift it to myself whilst she is still alive? if so what are the prop's and cons to this?
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.
Hi. Is the property your mother's home? Has it been so since she inherited it? How much is it worth? What is the value of your mother's whole estate?
Customer: replied 2 years ago.
Hi. No this is a post office and building / shop. Her house is probably worth 600k, total estate circa 1.2M. the post office and shop worth 550k
Expert:  TonyTax replied 2 years ago.
Thanks.
Does you mother run the business herself or just earn rental income form the building?
Customer: replied 2 years ago.
there is an incumbent tenant that has 2 years left to run - she received 16k per annum in rent and we are considering buying him out of the lease and developing the plot to residential and want to do this in the most tax efficient way possible
Expert:  TonyTax replied 2 years ago.
Thanks.
Leave this with me while I draft my answer. It will take a while.
Expert:  TonyTax replied 2 years ago.
Hi again.
You didn't mention that you and your mother want to develop the property in your question.
GIFT CGT
The value of the property at 31 March 1982 will be your mother's cost for Capital Gains Tax purposes. If she gifts it to you, she will be treated as having made a gain which will the difference between the value at which is gifted and the 31 March 1982 value as if she had actually sold the property for cash.
GIFT IHT
The gift will also be potentially exempt transfer for Inheritance Tax purposes which will remain in your mother's estate for seven years after she makes it. After three years, the potential IHT charge reduces under the taper relief rules. If she holds on to the property until she dies, then there will be no taper relief. A term assurance life policy could be used to cover the potential IHT charge but that may be expensive if your mother is elderly. Read about taper relief here:
http://taxaid.org.uk/guides/information/other-taxes-you-may-need-to-know-about/inheritance-tax/828-2/taper-relief-for-lifetime-gifts
DEVELOPMENT
If your mother sells the plot to a developer, she will pay CGT on any gain at 18%, 28% or a combination of the two rates depending on the level of her income in the tax year she disposes of it.
If she develops the plot and sells the homes them then she will be treated as a property developer and her profit will be charged to income tax at 20%, 40% and 45% depending on the profit level and national insurance contributions if she is under 65, not Capital Gains Tax.
If the property was put into a company, that in itself would give rise to a CGT charge on your mother. Take a look here for some notes on this:
http://www.fyldetaxaccountants.co.uk/property-articles/transfer-properties-company/
If the developed properties were let for a year or two, then she may be able to sell them and pay CGT as a property investor as opposed to income tax and NIC as a property developer. Clearly, it may be necessary to sell the new properties as soon as they are completed and that will limit the choices.
I'm afraid that there are no easy solutions and the older the potential donor is the more difficult it gets to take effective action. You and your mother should discuss the options with an accountant or tax adviser, preferably one that has been recommended by someone you or your mother knows so that some detailed figures can be produced for consideration.
I hope this helps but let me know if you have any further questions.