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TonyTax
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15914
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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My adult children and my brother together own the small

Resolved Question:

My adult children and my brother together own the small house my brother lives in. He has lived there since about 1990.
My children are happy to leave the house to be an investment for their old age, [they are in their 30s and have little other pension provision]. They would however like my brother to pay some sort of "rent" for using their half share.
My brother is happy to pay a "rent" but he wants security of tenure. He wants to know he can live there until he dies - he is 66. He also has money now to pay a "rent" but is worried that in the future he will not.
I have thought of an agreement that in consideration of a lump sum payment my children will promise not to sell the house for 30 years and to allow him exclusive possession for those 30 years. The lump sum would be calculated as 30 times the current annual open market rent discounted by 20% to allow for the difficulties of joint ownership and one of the joint owners [my brother] being unwilling to move out and rent to a stranger. The lump sum will be about £60,000.
The agreement would be personal to my brother so would end on his death.
Can you tell me how would the lump sum be taxed in my children's hands?
Would it be taxed as a premium under a lease? [I have looked up the provisions for this] or would it be taxed as income?
or would it be taxed in some other way?
Submitted: 1 year ago.
Category: Tax
Expert:  TonyTax replied 1 year ago.

Hi.

I cannot see that a payment of £60,000 could be seen as anything other than a lease premium.

As the length of the lease will be less than 50 years, part of the lease premium of £60,000 will be taxed as income and part as a capital gain. It's complicated by the fact that your brother has a 50% interest in the property but the principles are the same.

See Example 2 in HS292 here. In order to determine how much of the premium is chargeable to income tax and how much is chargeable to capital gains tax, you will need to know the CGT cost of the property and the value of the "freehold reversion" of the 50% of the property that your children own which will be subject to the 30 year lease. If you can find that out, then you can either follow Example 2 yourself to arrive at the figures you need or I can do it for you.

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

TonyTax and other Tax Specialists are ready to help you
Customer: replied 1 year ago.
Thank you for your reply which I have only just seen as I had problems logging into the Just Answer website. I will study the examples from the Helpsheet and I may need to come back to you. I am interested that you think it should be taxed as a lease - I think you are right. Sue
Expert:  TonyTax replied 1 year ago.

Thanks.

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