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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 father is a joint US/ UK citizen with property in the US

Resolved Question:

Hi,
My father is a joint US/ UK citizen with property in the US and a cottage in the UK which is his only address in the UK which he lives in for between 4 & 6 weeks in the year and lets out as a furnished holiday let rest of the year. It was £5K when he bought it in 1973, he's spent around £50K on it over the years & its now worth about £200K. He last lived in it full-time in 1975 and has no UK income but a US pension & other interests. He wants to transfer the UK cottage to me.
I'm a UK citizen and live in a property which is subject to a mortgage which I share with my cohabitee. I have no other houses and am usually on the threshold of being a higher rate taxpayer (it varies).
We're aware of IHT tapering relief and so my Q is about the CGT implications for both of us. I believe that a gift of the house to me will be treated as a disposal for CGT purposes. If so which of us will be expected to pay CGT and in approx what sum. Would the same principle apply to a gift of ca
Submitted: 1 year ago.
Category: Tax
Expert:  Sam replied 1 year ago.

Hi

Thanks for your question - I am Sam and I am one one of the Uk tax experts here on Just Answer.

For me to advise the Capital gain position that will fall on your father I need to know

1) Does he live in the USA the rest of the year (aside from the 4-5 weeks in the UK)

2) How many weeks is the property actually let for - and does it fully meet the furnished holiday let rules and is this income declared to the UK tax office and the USA IRS? (link here re furnished holiday let rules https://www.gov.uk/government/publications/furnished-holiday-lettings-hs253-self-assessment-helpsheet/hs253-furnished-holiday-lettings-2015

3) You then asked "Would the same principle apply to a gift of ca" but seem not to have finished the sentence

4) What will you do with this property?

I can then advsie re the Capital gains and Inheritance tax positions

Thanks

Sam

Customer: replied 1 year ago.
Thanks Sam. By way of response:
1) yes he lives in the USA rest of the year
2) It's available to let for 45 weeks in the year but on average is probably let about 15. It does meet the furnished holiday let rules however turns out he hasn't declared the income to either the US or UK tax offices
3) think I ran out of space - wanted to know if same principles would apply to him giving me cash/ paying off part of my mortgage
4) the plan is to use it as a weekend place tho be good to know if I'd get hammered if I sold it at a later date
Expert:  Sam replied 1 year ago.

Hi

Thanks for your responses

Then the first position to be rectified is for this income to be declared to the Uk tax office, they can then determine if it is truly furnished holiday lets.

They also will need to review his residency status to make sure no more than 90 days a year are spent in the UK for any one tax year. However the problem is that this relates back as far as 1975 - which creates a huge problem in him making a full disclosure to HMRC.

It may well be that his continued entitlement to UK personal allowances more than covers any taxable income that has arisen - but nonetheless he had a duty to declare this income.

As far as IHT is concerned you have already determined that as long as your father lives for more than 7 years from the date of making the gift - that it will be exempt from UK IHT - and the same applies if he sells and gives you the money. But he will incur a UK capital gain on either its sale or transfer as it will always remain a property that is not the main residence that is being disposed of.

  • How much this is will be dependent on whether your father is deemed to be not resident for tax purposes in the UK (hereby only liable to tax that arises on income that arises in the UK) and whether the property is treated as furnished holiday lets (so a trade) or as rental income (so under Sch A laws) Under normal rental income rules when a property was sold or transferred the capital gains rules used to be that as long as more than 5 years non residency had been achieved then any capital gain would be liable in the country of residence, but since 06/04/2015 these laws have changed any the element of any gain that had arisen from 06/04/2015 to the date of sale/transfer will remin liable in the UK - and I have added a link here re the new legislation https://www.gov.uk/guidance/capital-gains-tax-for-non-residents-uk-residential-property

But if this is furnished holidays lets then the gain remains liable in the UK as linked to an operating trade which continues until such time that the property is disposed of (through sale or transfer) so the full gain will be liable but just at 10%

So you can see I am unable to give you a definitive answer as the income (whether trade or just rental income) has not been declared to HMRC for 41 years - and that will create a huge problem - then there is the question of residency as the laws on that also changed - and your father then used this property to live in on his return visits - as the new laws that came into play from 06/04/2013 and this looks at time in the Uk but also continuing ties and whether property was retained and used as a base - and this legislation (very detailed) is here https://www.gov.uk/government/publications/rdr3-statutory-residence-test-srt

So the years also have to be split from 1975 to 2013 for residency purposes and then from 1975 to 2015 for capital gain purposes, and then the rentals themselves between trade income or rental income as to how the gain should be treated in the first instance.

I feel your father need to engage representation to make a full disclosure to HMRC for him and to wade through each of the issues thereafter based on events (which for the period of time will be timely, which I am sure you can appreciate) to try and find the best tax solutions based on the facts., But I will advsie the penalties for non declaration are likely to be high.

Let me know if I can assist further -

Thanks

Sam

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