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TonyTax, Tax Consultant
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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My brother and I currently live in a house my mum and dad bought

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My brother and I currently live in a house my mum and dad bought when we were young (35 yrs ago) my dad died in 2002, and my mum had moved out after splitting up and bought another house she has lived in since 2002. The house was left in my mums name as there was no will left by my dad and they were still married. The mortgage was paid off
The house has ever since been occupied by my brother and myself and no rent or money has been exchanged as it has always been seen as our house although was never transferred over.
Now we have reached a cross roads as I am wanting to move on and buy another house with my partner.
My brother wants to stay in the house and buy out my half which I am planning on using the money to buy my own house.
How do we go about transferring the equity over to my brother and me receiving the money for half of the houses value, and what tax would be applicable to us,
My brother has been to the bank and got a mortgage approved which is ready to go ahead.
We have been told by a solicitor that we would have to pay capital gains tax on the money exchanged due to my mum having no lived there for the last 14 years.
We are all scratching our heads as the best way to go about this.
Hi. Youi shouild refer to HS283 here for information on the main residence and CGT. As far as I can see, as neither your name nor your brother's are on the title deeds so you don't own it unless there is a document somewhere detailing a transfer of the property to you and your brother from your mother, then the property is still hers for Capital Gains Tax purposes. Your mother's cost for CGT purposes is the sum of half what was paid for it some 35 years ago or half the 31 March 1982 value which should be a little higher than the price paid in 1979 or 1980. If she transfers it to you now, there will be a taxable gain for the last 12.5 years (14 years less the last 1.5 years of ownership) as a proportion of the whole gain which may be reduced by letting relief. There are those in tax who believe that letting relief can be claimed if no rent had been paid but I'm not so sure of that, especially if there is no formal letting arrangement. Take a look here for the HMRC view based on case law which is not good from your point of view. Letting relief could reduce the taxable gain by up to £40,000. If your mother does transfer the property to you and your brother, then your cost for CGT purposes will be the value of the property at the time of the transfer (50% each) so you will be able to sell your 50% share to him CGT free as there will be no time for a gain to accrue and, in any case, your period of ownership will be covered by main residence relief. I hope this helps but let me know if you have any further questions.
A correction. Your mother's cost for CGT purposes is the sum of half the March 1982 value and half the value in 2002 when she inherited your father's half. Apologies for the omission. We have a new answer box which is difficult for me to get used to after nearly seven years on the site.
Customer: replied 2 years ago.
I'm probably more confused now than to begin with, we have started proceedings for my mum to sell my brother the whole house for half of its value, so that my brother would own 100% of the deeds, and my mum would then transfer the money over to me.
If I understand this, am I right in thinking my mum would have to pay 18% tax on the difference of the value of the house when she moved out (2002) to the house value now. ( was worth £50,000ish and is now worth £90,000) =40,000 - £11,100, allowed profit before tax kicks in? Would be 18% of £28,500, would be just over £5,000 tax to pay.
But if she's selling the house for 47,500, should she still be paying a tax based in the value? This is where I am confused.
And would I then have to pay an inheritance tax on money given to me by my mum??
Customer: replied 2 years ago.
I have looked at numerous government websites and because we seem to be such a unique case I can't see any category that we fall under.
Let me take a look at the new information and I'll get back to you in a bit.
If your mother sells the house to your brother for half its market value, there will be a gift equal to half the value of the house for Inheritance Tax purposes. So long as she lives for seven years after making the gift, its value will fall out of the valuation of her estate for IHT purposes. Take a look at the links below for information on IHT and on IHT taper relief.
As your mother and her son are "connected" for tax purposes, she will be treated as having sold the property to your son at its open market value, not the price paid, and her CGT liability if there is one will be based on that.
The cost for CGT purposes is the sum of half the March 1982 value and half the value in 2002 when she inherited your father's half. The gain is treated as having accrued evenly over the entire period of ownership from 31 March 1982 so the gain won't just be the increase in value since 2002.
There are two rates of CGT, 18% and 28%. The rate or combination of rates that your mother will pay will be dependent on the sum of her income and the net taxable gain in the year she disposes of the property. Take a look at the link below for information on how to calculate the rate of CGT that she will pay, if any.
Recipients of gifts don't pay IHT. The gift from your mother will be a potentially exempt transfer for IHT purposes which will fall out of her estate if she lives for seven years after making it. You will only be liable for any IHT if your mother's estate does not have enough in cash and assets to pay it. Take a look at the information below on who pays IHT.
Customer: replied 2 years ago.
I'm not sure on how to work out a CGT based on my mums circumstances, she doesn't work, she gets a widowers allowance of around £950 a month so I suppose this is her income. I'm not sure how this reflects in the tax she should have to pay when she sells the house. Or even what she would be taxed on upon selling the house, I just seem to be going round in circles.
The first £11,100 of any gains she makes in the current tax year will be tax free.
If her income is £11,400 per annum, she will only pay income tax at 20% on £800 as she has a personal allowance of £10,600 assuming she was born before 6 April 1948. That will leave £30,985 of the basic rate tax band unused so the first £30,985 of her net taxable gain will be taxed at 18% and the balance will be taxed at 28%.
If you tell me how much the house was worth at 31 March 1982, how much it was worth when your father died and the month in 2002 she moved out, I will work out the gain for you.
Customer: replied 2 years ago.
I think they bought the house for roughly £8,000 some 35 years ago, I estimate the house was worth roughly £50,000 in 2002, and my dad died in May 2002. We just had the house valued at £90,000.
I'll do some calculations and get back to you.
Customer: replied 2 years ago.
I would guess she moved out about 1-2 months before may.
Hi again.
Total period of ownership 1 April 1982 to December 2015: 405 months
Occupied by your mother to March 2002: 240 months
Occupied by sons: 165 months
Gain: £61,000 (£90,000 - £4,000 - £25,000)
Exempt gain: £38,859 (£61,000 / 405 x 258 (240 + 18))
Non exempt gain: £22,141 (£61,000 / 405 x 147 (165 - 18))
Annual CGT exemption: £11,100
Net taxable gain: £11,041
CGT at 18%: £1,987.38
I haven't claimed letting relief as the CGT liability is so small and I think HMRC would challenge the claim. If letting relief was allowed, it would be £22,141 (the lesser of £40,000, £38,859 and £22,141) and there would be no CGT to pay.
The gain will be lower as your mother will be able to claim legal fees against it.
Customer: replied 2 years ago.
Thank you for your help, I think you've covered everything I wanted, just one more question of you wouldn't mind?
The CGT due to be paid by my mum, when is this due? would this be taken out of the funds when she sells the house as a transaction, automatically so to speak, or is this something she needs to fill in a tax returns form at the end of the year and pay it then?
If the gift/disposal takes place in the current tax year, 2015/16, which ends on 5 April 2016, then the CGT will be payable on 31 January 2017. The CGT would not be taken from the sale proceeds. Your mother will need to register for self-assessment using a form SA1 and complete a tax return which will be issued to her after 5 April 2016.
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Customer: replied 2 years ago.
Ok thank you for your help. 😊