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This is about Stamp Duty, Capital Gains Tax, Property Law

Resolved Question:

This is about Stamp Duty, Capital Gains Tax, Property Law (on property) and Ownership.
In September 2014 I purchased a flat in London from my ex wife (we were already divorced at the time of the transaction). The property was valued at around £240K. I only had £125K at the time and we agreed on a sale for that price and to add a restriction on the deed giving her the right to stop me selling the flat on without her permission. The idea was that as soon as I had the rest of the funds to pay its full value I could do so, formally as a consideration for the removal of the restriction from the deed. From a previous justanwer, I understand we can do this and that the money transfer would not be considered a gift and would not attract tax (is that correct?). The original purchase did not attract Stamp Duty (below the threshold). With this extra payment, would the deed need to be modified to reflect the full valued paid? If so how? In that case, is stamp duty now payable? how much? how?. If then the property is sold if it is main main residence there will not be Capital Gains Tax. BUT if it is not considered my main residence (eg if it sold 18 months after I have not lived there), what will be considered by the tax man to have been paid for the property? £125K or £240K+?
An alternative to selling that I am considering is to transfer ownership to our son (as a gift to him) and then rent the property but I would like to find a way in which the rent income could be guaranteed to be paid to me. Is there a way to transfer a (high) percentage of the ownership to my son (say 90 or 95%) and have a legally valid agreement that any proceeds from renting will be only received by me? The idea here is to keep the property in the family, reduce inheritance tax but for the parents have a safe income.
Thanks
Submitted: 9 months ago.
Category: Tax
Expert:  Sam replied 9 months ago.

Hi

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

Yes stamp duty will be due on the total price paid as these will be treated as linked transactions so reflected through the transfer of deed and the conveyancer/solicitor that handles this furtehr transaction thereby granting you full ownership with no restrictions will raise the charge on you - and it will be on the total value and if this is NOT your only property then also the additional 3% surcharge will be added on.

But for capital gains, the transaction is treated as having taken place with the initial purcahse so Sept 2014 and therefore as you have never lived here - there will be a full capital gain on any increase in value form this initial value (in Sept 2014) and the sale/transfer value

Gifts never attract tax anyway - this was always a capital gain transaction formally chargeable on your ex wife if this had not been her main residence at the time of disposal to you for the previous 18 months so this was always the case - so I hope you were advised this by the other expert.

For you then capital gain you will be credited with whatever you have paid (so the original payment and this additional when made ) which is then deducted from the sale price.

Same applies if you transfer the property to your son and then the rents legally are treated as his not yours. Only way around this is to transfer just the % to him that you wish - and then this can be reflected in the rental income but as long as the property remains mortgage free then HMRC will accept this 95/5 split to you

There is no way of bending this just to mitigate future Inheritance tax I am sorry to say

I hope this helps

Thanks

Sam

Customer: replied 9 months ago.

Many thanks. If I may please ask you to clarify this on capital gains. When my wife sold me the property it was her only property and main residence. So she is not liable to capital gain tax? When I purchased it it was only my only property and I have lived since in the property (main residence), I am paying council tax and in the corresponding electoral register. I am looking at taking a job abroad. If I sell the property within 18 months of it not being my main residence, then there is no capital gains tax due? Did I understand you correctly that capital gains will be calculated on what I originally paid (£125K) and not on what we could agree to remove the restriction? (Incidentally, there is no mortgage on the property). If so, would it be possible to agree on removing the restriction for a pepper corn, say, and separately do a gift to her that is not liable to tax (or anything similar in between).

About my son. If I transfer, say, 90% to him when I die is is liable on inheritance tax for 10% of the property value or something else (for simplicity assuming this to be over the threshold)?

Many thanks

Expert:  Sam replied 9 months ago.

Hi

Thanks for your response

I can only advsie on your circumstances but I can generically advsie that is this was NOT your ex wifes main residence when she sold it to you , then she will have a capital gain consideration. Bu you advsie it WAS her main residence so its just you that will have a capital gain consideration, based on what you advsie.

I advised on the basis that you said what happens if it was not your main residence - if it has been then you will have no capital gains as long as yous ell within 18 months of it ceasing to be your main residence,

If after 18 months, then you will have some exemption for the time that you lived there, plus up to 18 months after vacating the property and any gain left over will then be considered for capital gains.

The capital gains is based on market values, not what you may or may not pay

And you seem to asking for advsie on how to proceed, which we are not permitted to do - we can only provide information as per Just Answer rules.

If you die within 7 years or transferring assets then you will still be liable to Inheritance tax (although this tapers off the longer the time that has lapsed between the date of the gate being made)and if you continue to benefit from more of the rental income then it will not be treated as a transfer at all, unless you can be seen to have transferred the % of legal ownership to your son and also the rental income (and of course he will have to be over 18)

I have added a link here re gifts and the 7 year rule

https://www.gov.uk/inheritance-tax/gifts

Let me know if I can assist further

Thanks

Sam

Sam, Accountant
Category: Tax
Satisfied Customers: 13810
Experience: 26 HMRC expertise, PAYE, Self Assessment ,Residency, Rental Income, Capital Gains, CIS ask for Sam Tax
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Customer: replied 9 months ago.

Dear *****. Thanks for your reply and sorry for the confusion on main residence (this was her main residence up to time of sale to me and it has been my main residence since the purchase). My remaining doubt is whether it is worth to value the consideration for removing the restriction, given that in any case capital gains (if any is due) will be calculated using the first transaction anyway. So, can I give her a gift independently of the sale and can she voluntarily remove the restriction or will this be seen as suspect by the HMRC? Thanks

Expert:  Sam replied 9 months ago.

Hi

Thanks for your response

Then your ex wife will have no capital gain at the first transaction and if you were to sell within 18 months of vacating this property then you too would have no capital gains either.

And as she in essence had kept 50% ownership - (although you call it a restriction) it will only avoid the capital gain IF the total deed ownership was in your name - if she also retained an interest - and you would need to seek legal advsie as to how this restriction would be viewed (whether just that or still an interest in the property itself)

But assuming it does not affect the ownership and deeds pertaining to an equal share owned, then yes you can "gift" the balance and she suffer no capital gain BUT then as long as you survive more than 7 years from the date of making this gift, or all or some of the value will have be added back into your estate - link here re gifts and IHT

https://www.gov.uk/inheritance-tax/gifts

BUT if you do decide to rent out - and then sell at a subsequent date (so more than 18 months after moving out) then you will have a large capital gain position as then the "gift" can not be used to offset against the sale price, only the original purcahse price.

But for the stamp duty position, much will be dependent on what is legally agreed and in writing from the beginning as to whether stamp duty will be due on the whole value - could HMRC Stamp argue this is a linked transaction - you will need to consult the solicitor who handled the original transaction and what legal documents were drawn up ...

Let me know if I can assist further, but if you have all that you need, then it would be appreciated if you could rate me for the level of service I have provided (or click accept)

Thanks

Sam

Customer: replied 9 months ago.

Many thanks. I have already rated your service. I have tried to rate it again but it tells me that I would have to pay again.... (each time one rates, a charge is made apparently). Thanks again

Expert:  Sam replied 9 months ago.

Hi

That is fine and thank you there is no need to rate again

Thanks

Sam

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