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TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15915
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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My parents are looking to give half of there business rental

Customer Question

My parents are looking to give half of there business rental home to myself and my brother.
It was bought for £77,000 in 1988 and now worth in the range of £1000000. over £100,000 has been spent on expenses.
What are the expenses to pass half of it on, from what I understand if we subtract the the house price from 1988 as well as the maintenance cost which gives us a total of £177000 to subtract from the current property price of £1,000,000 leaves us with £833,000 in which if they were to pass on half the home after subtractions £416500 would we have to pay 28% CGT of £416500 with the bill being £116620.
Is this correct ?
can we use capital gains allowance to help reduce the bill?
who should we contact to help us put this together?
Submitted: 1 year ago.
Category: Tax
Customer: replied 1 year ago.
Posted by JustAnswer at customer's request) Hello. I would like to request the following Expert Service(s) from you: Live Phone Call. Let me know if you need more information, or send me the service offer(s) so we can proceed.
Customer: replied 1 year ago.
ignore call me request please write the answer
Expert:  TonyTax replied 1 year ago.


You mention maintenance costs of £100,000. What exactly do you mean by "maintenance"? Do you mean repairs or improvements?

Customer: replied 1 year ago.
correct expences
Customer: replied 1 year ago.
We are looking to reduce IHT Tony but would like to have the actual facts to present to my father, I feel it is better to pass part of our business rental home home as we can take advantage of the property expenses and 1988 house value to write it off the raw £1000000 as well as benefiting from capital gains yearly allowance.I would like to avoid 40% of £1000000 IHT when the time comes
Expert:  TonyTax replied 1 year ago.

I'm afraid "expenses" doesn't tell me what I need to know. Everyday repair and maintenance costs such as plumbing or electrical repairs or redecoration would have been deductible from the rental income for income tax purposes in each tax year since 1988 and cannot be added to the cost of the property. Improvement costs which can be added to the cost of the property for CGT purposes would be for such things as an extension, the installation of central heating in a house which didn't previously have it or the addition of a conservatory for example, ie things which would enhance the value of the property.

Assuming that the £100,000 is improvements costs, then the overall cost is £177,000. Your parents are, therefore, sitting on a gain of £823,000, £411,500 each. If they gave you and your brother half the property, they would each make a gain of £205,750. The first £11,100 of that would be tax free leaving them each with a net taxable gain of £194,650.

There are two rates of CGT on property, 18% and 28%. The rate or combination of rates that they would each pay would be dependent on the level of their respective incomes in the tax year they make the gift. In the current tax year, 2016/17, a maximum of £32,000 of their respective gains can be taxed at 18% but that figure (£32,000) will be reduced by £1 for every £1 of income they each have in excess of £11,000. Therefore, the CGT liability for each of them will be somewhere between £51,302 (£32,000 @ 18% + £162,650 @ 28%) and £54,502 (£194,650 @ 28%).

The gift of half the property to you and your brother will be a potentially exempt transfer by each of your parents of £250,000 each for Inheritance Tax purposes. So long as they live for seven years after making their respective gifts, the value of those gifts will fall out of their respective estates for IHT purposes, saving 40% in IHT. As you will see here, after three years, the potential IHT charge would start to taper away.

I hope this helps but let me know if you have any further questions.

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Customer: replied 1 year ago.
Hi TonyAfter speaking with my dad I have had to correct my figures to include my parents income from the rental home aswell as pensions.I have the correct figures the house was bought in 1987 for 78000 and improvements done were £24000 giving us a total off 102000, let say the price of the property is approximately £1000000.Mums pension on AVG per year £5373.48
Dads Pension on AVG per year £10620Total income from rental property per year is £31224 that is £15612 each for both mum and dad, with these figures which are not %100 accurate as I have not included repairs maintenance or cost for the rental property, could you please give me based on this information how much will it cost for my parents to part with half of the property to myself and my brother.Also lets say my parents were to die before 7 years will the government refund the capital gains payment back to myself and my brother?Thanks Tony
Expert:  TonyTax replied 1 year ago.

Leave this with me while I do some calculations.

Expert:  TonyTax replied 1 year ago.

If your parents give you and your brother half the property, they would each make a gain of £224,500 (£250,000 - £25,500). The first £11,100 of that would be tax free leaving them each with a net taxable gain of £213,400.

Assuming a gift halfway through the current tax year, your father's income will be £18,426 (£10,620 + £7,806). The first £11,000 will be tax free so he will pay income tax at 20% on £7,426 at 20%. His CGT liability will be £57,294.60 (£24,574 @ 18% + £188,826 @ 28%). Your mother's income will be £13,179. The first £11,000 will be tax free so he will pay income tax at 20% on £2,179 at 20%. Her CGT liability will be £56,769.90 (£29,821 @ 18% + £183,579 @ 28%).

None of the CGT would be repaid if your parents die before the seven year period is completed.

Customer: replied 1 year ago.
Thanks TonyBoth my parents now are 78 and 80 years old what would you suggest a strategy to look at to reduce me and my brothers IHT bill when that time comes.I was looking into maybe putting the property that is divided up into 3 flats into a limited company and using an employee ownership trust to help move it out of IHT, any ideas because giving up £400000 of my dads hard earned money does not sit well with me ?
Expert:  TonyTax replied 1 year ago.

You could investigate the possibility of term assurance policies which have reducing cover as the IHT liability starts to taper away after three years but, given their ages, that would be expensive.

Trusts are not as tax efficient as they used to be and as for employee trusts I don't know enough about them. Frankly, given the amount of money at stake, its not something I could really get involved in here and has gone beyond the scope of the original question in any event. You really ought to consult an independent financial adviser in conjunction with a tax planner to see if there are any routes you can take. What I can tell you is when it comes to residential property, they aren't seen by government as proper businesses as a business that makes widgets is and, therefore, it won't be easy to make the IHT vanish. Even lifetime gifts into trusts can give rise to a lifetime IHT liability at 20% on the excess over the nil rate band and then there are 10 year IHT charges and exit IHT charges.

Customer: replied 1 year ago.
One last question is it possible Tony for my mum and dad to leave every year the tax allowance (mum £11,100) (Dad £11,000) which is about 2% of(###) ###-####of the property. That would be great to take advantage of it every little bit helps.
Thats it Tony will be happy to give you a five star reviewThank you
Expert:  TonyTax replied 1 year ago.

Yes, you could do that.

The property would need to be revalued at the time of each partial gift to you and your brother.

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