CGT + Inheritance advice... help please [Archive]

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EH11

08-11-2006, 10:16 AM

Hi, i'd really appreciate any guidance with a tax question I have. I live with my girlfriend and the mortgage is in her name. I also own a property that I inherited when my Gran passed away a couple of years ago. I got my solicitor to transfer the deeds for the property into my name, although the mortgage is still in the name of my gran's estate and i'm paying it ( i was the guarantor when she bought the property from the local authority).

If I sell the property, will I be charged CGT? I guess as it's my only property, I shouldn't be charged CGT? Also, is there an issue with inheritance tax? The value is of the flat is £80k.

Thanks in advance for any guidance.

Aris

08-11-2006, 21:26 PM

Hi,

with regards to CGT you should be liable to tax on any capital appreciation from the point in time of the deceased's pass-on. That is, the amount of capital gains to be considered for taxation would be the difference between the price the inherited property is sold, when it is, minus the property's value at the time it was passed to you (time of the relative's pass-on) and of course minus any capital-related expenses including sales expenses (not sure if you could include here expenses incurred that relate to the process of your inheriting the property e.g. solicitors etc.). From the amount calculated you take away your annual allowance of about 8.5K I think. Taxation works on the remaining amount at the at the higher percentage rate you are taxed at.

Now, since the property is in your name, you should be exempt from CGT only if it is declared as your Primary Private Residence, and in order to do that you should inform HMRC in writing. from a tactic point of view that is what you should do since your current residence is in your partner's name (I assume). Careful, you dont clarify if the property you live in now is only in your partner's name or in both names, which is different to the fact that the mortgage on the property is in your partner's name (you may own the property in commonin the deeds but it was purchased with money of the mortgage your partner took out).

Hope this helps

Aris

Aris

08-11-2006, 21:34 PM

regarding inheritance tax, you would need to account for the overall estate own by your granny that was accounted for in her will. If this is valued below the IHT zero band (285K this year) then your inherited property is not incurring any tax. Otherwise, all beneficiaries of the will should arrange for payment of the share of tax they incur depending on the share they enjoyed out of the deceased's probate.

In other words, if your granny's total estate was worth 300K, tax will be required for the 15K (at 40% that should work out 6k) which should be paid by the beneficiaries. Each one's share for payment of this 6K should be pro rata w.r.t. how much is the worth of the inherited goods.

The fact your flat is worth 80K therefore does not clear you of any tax concerns, and you should look back to the total worth of the bequeathed estate.

Aris

EH11

09-11-2006, 15:13 PM

Tax Accountant

09-11-2006, 18:58 PM

Aris, many thanks for taking the time to reply. To confirm on the two points answered -

The house was the only asset in the estate. There was no cash or other assets. Therefore, I will not be subject to any inheritance tax?

On the CGT, I can claim that the property is my primary private residence as it is the only property I legally own. I do not have to live at the property? In the same respect is it ok to disclose this fact? Or by contacting the HMRC do I have to state that I live at the property. I guess what i'm saying is, does my primary private residence have to be the place I stay or can it be the only property I own?

This tax business is a minefield. Once again, thanks for your clarification.

There is no IHT on your granny's estate on the basis that this was the only asset in her estate.

Residence for CGT purposes is a matter of fact. If you have never lived at the inherited property as your home, you cannot claim the ''only or main residence'' exemption even if you don't own any other properties.

You cannot, and should not, claim that the property was your residence if this is not true.

However, if you do start using the property as your residence, even as a secondary residence, you could nominate in writing to the tax office that the inherited property is your main residence for the purposes of ''only or main residence'' exemption. BUT I MUST EMPHASISE THAT THE PROPERTY MUST BE USED AS YOUR RESIDENCE (NOT NECESSARILY MAIN RESIDENCE) IN ORDER TO NOMINATE IT AS YOUR MAIN RESIDENCE.

If your nomination is valid and it is accepted as a matter of fact that the property was your residence (home) at anytime in your ownership, the final 3 years period of ownership is exempted from CGT.

Ramnik

EH11

24-11-2006, 09:42 AM

thanks for this Ramnik. I'm going to move into the property to ensure that I minimise my CGT liability. Couple of final questions if I may -

1) Am I correct in saying that i'll need to stay at the property for a minimum of 6 months?

2) You mentioned that the final 3yr period of ownership is exempt from CGT, how does this work? If the flat was bought for Oct 2004 for £10k (but valued at £20k as it was an ex-local authority house with discount). My Gran passed away in Jan 2005 (unaware of value at that time). The flat is now valued at £40k in my name. How does the 3 year rule work and where do they take their figures from?

Tax Accountant

24-11-2006, 10:51 AM

thanks for this Ramnik.

I'm going to move into the property to ensure that I minimise my CGT liability.

Couple of final questions if I may -

1) Am I correct in saying that i'll need to stay at the property for a minimum of 6 months?

There is no minimum period stipulated by law. However, the longer the period, the more likely it is that it will be accepted that you actually used it as your home. For example, how many people do you know who have stayed in their home for less than a year before moving out and letting or selling it?

6 months is banded around quite often, but I would say more like a year. But if you found a job say 100 miles 3 months after moving in, even this may be sufficient.

The correct answer is: It depends on your exact circumstances, intentions and actual use of the property and more importantly why you moved out again, especially if you moved out after only a short period.

2) You mentioned that the final 3yr period of ownership is exempt from CGT, how does this work? If the flat was bought for Oct 2004 for £10k (but valued at £20k as it was an ex-local authority house with discount). My Gran passed away in Jan 2005 (unaware of value at that time). The flat is now valued at £40k in my name. How does the 3 year rule work and where do they take their figures from?

Gain is the increase in value since you inherited it in Jan 2005. All gain is spread evenly over the whole period of ownership.
If it is accepted that you have used the property as your home at some point in time since Jan 2005, all gains falling in the following period is exempt:
Final 3 years of ownership, plus
any period before the final 3 years when it was used as your home.

Therefore, provided you use it as your home and sell before Jan 2008, all gains is exempt.

But if you move in say Jan 2007 and sell in say Jan 2010, you will have owned it from Jan 2005 to Jan 2010 = 5 years of which only the final 3 years is exempt, leaving 2 years worth of gains potentially exposed to CGT. But then this exposed gain may be covered wholly or partly due to other reliefs such as lettings relief (if it has also been let some of the time in your ownership), taper relief and annual CGT allowance.

It is possible that you could use it as your home for 1 year from now, let it for the next 5 years before selling it, and still have all the gains completely exempt from CGT, depending on the actual increase in value since Jan 2005 to when you sell it in 6 years time.

See answers above in red.
Ramnik