Hi again.
There are two issues here. Capital Gains Tax is one and Inheritance Tax is the other.
CAPITAL GAINS TAXIf your father had retained ownership of the house and it was sold to pay for his care home fees, there would be no CGT liability for him assuming that he had lived in it for the whole period of his ownership. In addition, a maximum of the last 18 months of ownership would be given as a tax free period if he moved out before the house was sold.
Assuming that you and your brother are the owners and that you are not simply holding it for your father because of his poor health, then you and your brother may have CGT to pay. You will be deemed to have acquired the house at the date it was put into your names and your "cost" for CGT purposes will be its value at that time which you say was two years ago. If the property is sold for more than it was worth two years ago, you will each have a gain of half the difference between the value two years ago and the net of sale expenses disposal proceeds.
The first £11,000 of your respective shares of the gain will be exempt from CGT assuming you have no other gains in the tax year the house is sold and the balance will be charged to CGT at 18% or 28% depending on the sum of your respective incomes and your respective shares of the gain in the tax year of disposal. What you do with the money will have no influence on the CGT situation I'm afraid.
INHERITANCE TAXWhen your father gave you and your brother the house, he made a gift to you. However, as he retained the right to live in the house it was a gift with reservation of benefit unless he paid a full market rent to you and your brother. Take a look at the notes
here and
here for more information.
In practical terms, this means that the house remains as part of his estate for Inheritance Tax purposes for as long as he continues to reserve the right to live in the house notwithstanding the fact that you and your brother own it. As the house disposal money will be used to buy another property for your father to live in, the reservation will continue until your father moves out which is unlikely to happen or he passes away. If the reservation of benefit is still in place when he dies, then the value of the flat and the cash left over from the house disposal at that time will be included in his estate for Inheritance Tax purposes.
At present levels, the first £325,000 of an individual's estate is exempt from IHT when they die. This can be increased if the deceased was a widow or a widower and their executors apply for any unused part of their late spouse's nil-rate IHT band to be transferred to the spouse who passes away later. You can read more about that
here.
PRE-OWNED ASSET TAXThere is the possibility of a charge on your father under the pre-owned assets tax rules which you can read about
here and
here. This may be negated by the fact that when the house was given to you, your father retained the right to live there which makes it a gift with reservation. As he is about to move, it could be argued that he has retained the right to continue to live in a property provided by you with the disposal proceeds of the house but to take a belt and braces approach, you might consider making the election for the gift with reservation rules to apply to avoid a POAT charge especially if his estate won't be liable to Inheritance Tax..
I hope this helps but let me know if you have any further questions.