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bigduckontax, Accountant
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My two brothers and I are the joint heirs of our parents.

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My two brothers and I are the joint heirs of our parents. When my father died (March 2007) the family home was valued at £400,000, and when my mother died (February 2010) it was valued at £350,000. In probate, my father's half of the house counted for £200,000 and my mother's half for £150,000. We have just sold the house for £625,000. Can we pay tax on this individually, i.e. each of us start with a capital gains tax allowance of £11K? We are all basic rate tax payers. Can we deduct from the tax liability the money we spent doing the house up?

Hello, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question.

Yes, you each have a liability for half the gain on the property on sale and each have an Annual Exempt Amount (AEA) , currently 11.1K, to offset this. The gain is calculated from the difference between the net selling price and the acquisition price. The former is what you receive for the house less cost of sales including advertising. The acquisition price will be the probate value plus any improvements eg installation of double glazing, central heating extensions etc, but not routine maintenance. This gain, half each as I explained, will be taxed at 18% or 28% or a combination of the two rates depending on individuals' income including the gain in the tax year of sale. I have assumed that the house was never let out or lived in by either of you. Please advise on this point. Also, did your father leave the house 100% to your mother?

In any event you will not be liable for the full gain as for the last 18 months of ownership you are deemed to be in residence even if this is not the case and Private Residence Relief (PRR) is extended.

Customer: replied 1 year ago.
Hi Keith. There are three of us, not two, myself and two brothers. My father left his share of the house (£200,000) to the three of us as part of a Will Trust (the other £85,000 being made up of investments) and the other half was left to my mother. One of my brothers was a permanent resident in the house until it was sold; it has never been let out and he didn't pay rent for living in it. The work we had done on the house included double glazing, two completely new bathrooms and a new downstairs toilet, refitted kitchen, replastering of walls and ceilings and redecorating. Can this be considered as improvements rather than routine maintenance? There was some routine maintenance to the roof as well.
Customer: replied 1 year ago.
What is Private Residence Relief? Do we all qualify for it or just the brother who was living in the house?

For starters your brother who lived in the house all the time is entitled to PRR which relieves CGT at 100%. He has no tax liability persuant to the sale.

Yes, those are enhancements rather than maintenance. The gain is 625K - 400K - enhancement costs divided by three. Each share (excluding the resident brother) is adjusted by a factor of the date of your mother's death, the date of sale (to give an occupation time) say A in months. Then take A, deduct 18 to give B. B / A of the gain less the AEA each is the proportion exposed to CGT. This will be taxed at 18% or 28% or a combination of the two rates depending on the individuals' income including their share of the gain in the tax year of sale.

The 18 is the PRR for the last 18 months as I explained earlier.

Customer: replied 1 year ago.
Not sure I understand about the time factor thing. What is the AEA? My mother died in February 2010 and the house was sold in June 2016. But surely we will only be paying the CGT for the year in which we received the money?

The AEA is the Annual Exempt Amount, a non cumulative entitlement which is given to CGT payers to offset that tax.

You would be liable for CGT in the year of sale, but on the gain between the death of your mother and the sale date less the last 18 months when you are deemed to be in occupation even if this is not the case. Total ownership was 76 months, knock off 18 leaves 58 so 58 / 78 = say 75% of the gain less the AEA is exposed to the tax.

Customer: replied 1 year ago.
I still don't understand this. Are you saying we have to pay tax for the years when we owned the house but hadn't sold it?

No, you are only liable for tax in the year of sale on the gain made over the period of ownership. That is how CGT works and always has.

Customer: replied 1 year ago.
Thankyou Keith I think I understand now. So, to summarize, we will have to pay tax on c 75% of £194K i.e. £620K (the sum we received net of costs) less £400K less £26K (what we spent doing the house up) and of that £145.5K when split in three, my older brother is not liable because he was living in the house the whole time, and my other brother and I will pay tax on £48.5K less £11K AEA each, is that right?
And is any of this affected by the existence of the Will Trust?

Not quite, the AEA is 11.1K so only 37.4K is exposed to CGT; worst case scenario is a tax bill of some 10.5K each.

The will trust will not affect the position, it is only there to assist in the distribution in the longer term.

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