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.

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In 1988 I married a woman who lived with her two teenage sons in a tiny house she had bought two years before. In 1990 I sold my own previous residence, intending that we should buy a larger home together. The next year the property next door to my wife's house came on the market; we bought it, knocked through and extended our home. This second house is in my name and the deeds remain separate.

We pay full council tax on each, although some utility bills and the television licence are recognised as for a single property. Now we wish to move, raising the issue of a large capital gain on our "second" marital home.

It would obviously be easier for us to separate the houses and sell one at a time, and we have toyed with the idea of keeping one house for rental income during our retirement.

I had in mind to ask Revenue and Customs for a declaration that we have one property only, but understand they will not discuss Capital Gains Tax (CGT) matters prior to a sale. Where do I stand?

Maggie Fleming writes:

There is no explicit guidance in the legislation as to what constitutes a dwelling house qualifying for CGT relief.

There is some case law, but that is mostly concerned with mansion houses with outbuildings. We shall therefore have to rely on common sense and a common-sense approach would indicate that, although the properties have separate deeds, they constitute a single residence.

The important fact is that you have converted two properties into one by knocking through the walls and establishing internal communication. I cannot see that Revenue and Customs will argue with that.

If you sell the property as it is, there should be no difficulty. If you separate the houses and sell them one at a time, there should still be no problem with Revenue and Customs - the legislation specifically permits relief to apply on the sale of part of a dwelling house.

However, if you decide to sell the titles separately or to retain one of the houses as a rental property, I recommend that, to be on the safe side, you take photographs of the property before ''reseparation'' to prove that this had been a single household. You should also keep documentary evidence - such as the utility bills and the TV licence.

My wife and I have power of attorney for an elderly lady who is no longer able to care for herself. We have to decide whether to sell her bungalow, which is worth about £300,000, or to let it, in which case about £6,000 will have to be spent to bring it up to an acceptable condition. Either way would meet her financial needs.

In making the comparison, one fact is critical; will her bungalow continue to qualify as her Principal Private Residence (PPR) until her death, despite the fact that she is now living in a home for the elderly and her bungalow is being occupied by tenants?

Maggie Fleming writes:

The bungalow will cease to be this lady's only or main residence when she stops living there, even though she owns no other property. However, if you are certain that the property would be retained until her death, there is no Capital Gains Tax (CGT) problem, as that tax does not apply on death. Inheritance Tax (IHT) is charged on the value of the estate but, from a CGT point of view, the bungalow would simply pass to her legatee at probate value. This would be the legatee's acquisition cost on a future sale - in effect, there would have been a tax-free uplift in value.

Even if you think that the property may have to be sold in the future, you could let the property for several years without incurring a CGT charge. This is because of the way in which PPR relief is calculated. On sale, the gain is time-apportioned between periods qualifying for the relief and periods which do not. In addition to periods when she lived in the property, the final three years of ownership always qualify for relief. Furthermore, there is an extension to the relief that exempts additional gains of up to £40,000 where the bungalow has been let out as residential accommodation.

Given these extensions to PPR relief - in addition to indexation allowance, taper relief and the annual exemption (currently £9,200) - no liability would arise for more than three years after she left.

My wife and I own four properties (including our main home) with an approximate value of £750,000. Two are rented out and my father lives in another. About four years ago we bought an additional property (current value £170,000) but, to minimise Capital Gains Tax (CGT), this property is owned by our son, and I act as guarantor for the mortgage, which I pay.

Our son has quit his postgraduate studies to pursue a musical career with his band. We would now like to move this property out of his name and into our names, potentially including our daughter. Can you please advise the best way to do this from a tax point of view?

Maggie Fleming writes:

If your son has been living in the property as his only or main residence for the past four years, he will not have any CGT to pay on gifting the property to other family members. However, if he has been living elsewhere, he will have to pay tax on the growth in value, less a small amount of taper relief (10 per cent if the property has been owned for a full four years).

In either case, you will acquire the property at its current market value, which will be your base cost on eventual sale to a third party. If your daughter is given an interest in the property and uses it as her only or main residence throughout her period of ownership, her share of the gain will be exempt on a subsequent sale but you and your wife's share of gains will be taxable.

For IHT purposes, the gift of the equity is a potentially exempt transfer by your son but will fall out of his estate after seven years. His total assets are unlikely to exceed the nil-rate band at present - but there's always the possibility his band will succeed and he will become very rich.

From your point of view, assets can only usually escape IHT if you give them away at least seven years before death. The danger of outright gifts is that your child may be made bankrupt or get divorced. You may want to discuss setting up a family trust with your solicitor.