Property and Tax Issues

Isis' Maggie Fleming answers readers questions in Saturday's Daily Telegraph newspaper for the Property Clinic section.

The questions and answers are reproduced for you here.

This page contains Questions & Answers from November 2006. Older articles are accessed through our Archives page.

There is a wealth of information on these pages. If you have a specific interest, please use our Search facility.

My wife and I jointly bought a second property in 1997 which was transferred into my wife's name in 1999 due to her having the lower income, since when it has been rented out. At no time has the property been our main residence. You have previously advised transferring such a property into joint names prior to selling to take advantage of capital gains tax (CGT) relief for both husband and wife.

However, could you clarify the amount of taper relief each of us would be due if the property is now transferred to our joint names prior to selling next year. Are we both eligible for the full taper relief since purchase in 1997 or will I be eligible only for the fraction of the time the property is held jointly? If the latter, it may not be beneficial to transfer to joint names.

Maggie Fleming writes:

Where an asset is transferred between husband and wife, or between civil partners, special rules apply. The transaction is treated as being on a "no gain, no loss" basis. In effect, this means that the transferee acquires the asset at the transferor's base cost. This includes indexation allowance up to April 1998.

Furthermore, to address your specific concern, the qualifying ownership period for taper relief purposes is your combined period of ownership. If you transfer ownership of the property into joint names and sell before April 6, 2007, you will each be entitled to 35 per cent taper relief. If you wait until after April 6 next year, only 60 per cent of the gain will be chargeable.

However, before transfer, it is important that you have two calculations prepared - one showing the tax payable if you do transfer and one with the tax payable if the property remains in your wife's name alone.

If the gain is large, which is probably the case with a property owned for almost 10 years, it is likely to be advantageous to put it in joint names before sale. This is because you can make use of two personal allowances (currently £8,800 per person) and also any of your and your wife's unused basic rate bands.

However, in cases of a smaller gain, where one spouse has a very low income, it can be better to keep it in that spouse's sole name. I have seen cases where the tax saving on transfer into joint names was so small that it was wiped out by the legal fees for the transfer.

My wife and I bought a house in central London in 1970. Although we lived in the house with our children until 1976, we then moved away from London and rented the house to different tenants on a yearly basis. Apart from a short period in the 1990s when I returned to the house (as a widower), it has been rented out since 1976.

I have now given the house to my son, who currently lives and works abroad but will eventually return to live in it. Inevitably, house price inflation in central London has led to a large notional capital gain and an eye-watering Capital Gains Tax (CGT) bill.

My wife died in 1985 and the District Valuer has insisted that my half share of the property at the time of her death was not the arithmetic half of its 1985 value but 10 per cent less than the arithmetic half, because it was jointly owned. However, my wife and I were tenants in common and I became the sole owner of the house at that time. I cannot see any justification for this arbitrary 10 per cent reduction in its value, adding several thousand pounds to the CGT bill. Is the ruling correct?

Maggie Fleming writes:

It is customary to value an undivided share in jointly held property at a discount to the open market value on the principle that the value of the whole is greater than the sum of its parts. However, I fail to see why your original half share is being valued at the date of your wife's death. The gain on the share of the property which you have owned since 1970 should be based on either its acquisition cost or its value at March 31, 1982, whichever produces the lower gain - is this the value that is being discounted?

Your gain on the share of the property which you inherited on your wife's death would be based on probate value, if this was ascertained. This valuation may already include a discount, unless the valuation was not considered in any detail - possibly because no inheritance tax liability arose. Either valuation would be made with reference to the property's physical condition at that time and any tenancies at that date, as well as the fact that what each of you owned was an undivided share of the whole property. In a 2001 Lands Tribunal case, the tribunal upheld the district valuer's contention that a 10 per cent discount should apply. I doubt that you would be successful if you sought to contest the district valuer's decision.