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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My extended family (brothers, sisters, aunts and uncles, eight people in total) clubbed together to buy a house for my parents 20 years ago. The solicitor told us that it was not possible to register everyone as part-owners and so three of us hold the property in trust for everyone.

My question is this: does this count as a trust for HM Revenue and Customs purposes when the house is eventually sold?

The "trust" was set up simply because of the land registry rules. We do not receive any rent from my parents. The general running costs are paid by them and the eight owners pay for any major property expenses.

It seems very harsh that we would have to take a big hit on Capital Gains Tax (CGT) just because the house has more than three owners?

Maggie Fleming writes:

Legally, the maximum number of people who can own land is four. If there are more co-owners, it has to be held on trust for all co-owners, as you describe. For tax purposes, this is a "bare" trust arising from a legal requirement and Revenue & Customs look through it and charge all the co-owners CGT when the property is sold. It is not treated in the same way as other trusts.

When you sell the house, each of you will be assessed on his or her share of the gain and will be able to make use of the usual reliefs - indexation allowance, taper relief and the annual exemption (currently £9,200 per person). If any of the major property expenses you mention are of a capital nature and fall into the category of "enhancement" expenditure, their cost will also be allowable.

If worthwhile, some co-owners could transfer part of their share to a spouse or civil partner, provided this was a gift with no strings attached.

From your final sentence, I get the feeling that you think Principal Private Residence relief would be available if there were no trust but this is not so, as your parents would not be beneficial owners in any case. However, there is an important exception to this rule. If the property was purchased before April 6, 1988 and your parents were elderly or incapacitated at that time, you should seek professional advice, as you may fall within the requirements for Dependent Relative Relief, in which case the gain would be tax-free.

Could you please explain the situation with Capital Gains Tax (CGT) for second homes that are required purely because of the location of your work? My job is 180 miles from our main residence and I spend five or six nights a week in the "second" home.

Revenue and Customs documentation implies that a property linked to work may not be liable, but it will not give an answer to a direct question as to whether CGT is to be paid. Are you able to help clarify this situation, please?

Maggie Fleming writes:

It sounds as though you have got hold of the wrong end of the stick. The reliefs that apply to people who work at a distance from home are intended to preserve principal private residence relief on their main residence when they sell it, not to extend that relief to the second home. Without such provisions, they could find themselves paying tax on the sale of their family home on the grounds that they were not living in it for the entire period of ownership.

A person can have relief on only one property at any one time. For these purposes a married couple or registered civil partners are treated as one unit and can have only one property between them qualifying for the relief. It makes no difference that the second property is used solely because of the location of your workplace.

Provided you are in time, you could elect to nominate your second home as your main residence for CGT purposes - there can be tax advantages in nominating a second property for a short period, as it ensures that the final three years of ownership are exempt from tax. The election can be backdated but the deadline for making it is two years after the second property to be acquired has first been used as a residence. You could then vary the election in favour of your main home, if that is the one with the greatest potential gain.

This is a complicated area and you should consult a qualified tax practitioner about it.

Our flat is held in mine and my partner’s names as joint tenants. Is this for the best?

When you buy a property with another person, you have a choice of ways in which to own it. The usual way is as joint tenants. With joint tenancy, you own the entire property jointly. If one co-owner dies, the property automatically passes to the other – you cannot leave it by will to a third party.

What about tenants-incommon?

With tenants-in-common, each person owns a specified share of the property. If one dies, their share passes via their will or, if there is no will, according to the laws of intestacy. It is therefore important that tenants-incommon have valid and up-todate wills.

Tenants-in-common sounds more useful.

Yes, it is more flexible than holding it as joint tenants. It can be useful where, for example, one of the co-owners has children from a previous relationship and wants to leave their share ultimately to them rather than to the surviving partner – the partner can be protected by a trust giving them a life interest in the property.

Are there any other inheritance implications?

Severing a joint tenancy and becoming tenant-in-common is also a jumping-off point for much Inheritance Tax (IHT) planning. As a share of the family home can be willed away from the spouse (or civil partner) and left to adult children, it may enable both coowners to use their nil-rate bands fully. There are also various “debt or charge” schemes where the deceased’s share of the property is left to a trust but the surviving partner retains the assets by signing an IOU in favour of the trustees. This is an area that HM Revenue & Customs are wary of, however, so you must make sure that any IHT planning is done by an expert.

So is it difficult to switch?

No, the procedure of severing a joint tenancy during life is straightforward and can easily be arranged by a solicitor. A joint tenancy can even be severed within two years of death by a deed of variation, but this is a more complex matter and various conditions must be fulfilled.