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 January 2008. Older articles are accessed through our Archives page.

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We bought some land with planning permission for two houses, with the idea of selling off one plot to fund building a house on the other. To minimise the Capital Gains Tax (CGT) liability, we made our two grown-up children joint owners of the land, and all paid our individual CGT on the sale of the first plot. We are now living in our new home and the children still share ownership with us. Are there any advantages to this arrangement for inheritance tax purposes, or will it cause confusion when our estate is wound up or if we sell up?

Maggie Fleming writes:

Yes, it will cause considerable confusion, and your children and your estates are likely to end up paying much more tax than necessary.

If your children did not contribute towards the purchase price and are not living in the property with you, there is a partial gift with reservation of benefit for inheritance tax purposes. This means that the gift is disregarded and, unless you remove the reservation of benefit in the meantime, the value of the property gifted will fall into your and your wife's estates on death. The figure used will be the value at the date of gift or the date of death, whichever is higher. This will involve expensive extra valuation and legal work and will delay probate.

There is more bad news. Although the gift is ineffective for IHT, it is eligible for Capital Gains Tax: your children will be liable to tax on 25 per cent of the gain each, less allowances, when they sell the property. If it were in your and your wife's names only there would be no CGT as the principal private residence exemption would apply. Furthermore, a property owned by you benefits from a tax-free CGT uplift on death - the probate value is used as the cost price on a subsequent sale - whereas your children will have to use the original purchase price as the base on their share.

You should take urgent professional advice as to how best to resolve this situation.

In 1978, I bought a house for my sister, who had multiple sclerosis and was unable to work. I paid all the bills and she lived there until her death in 2006. I have just sold the house for £500,000, having bought it for £30,000. When my sister was dying, I moved in to look after her and I stayed there for six months after her death. The house I normally live in belongs to my husband.

Can I claim my sister's house as my main residence? How much Capital Gains Tax will I have to pay?

Maggie Fleming writes:

It makes a pleasant change to be the bearer of good news. On the facts you have given me, it is likely that you will not have any CGT liability at all, as it sounds as though you fall within the provisions of dependent relative relief.

This was abolished in 1988, but transitional relief is still available where the relative was in residence on April 5 1988. It applied where a home was provided, rent-free and without any other consideration, for a dependent relative unable to maintain themselves because of age or illness. And it works in the same way as if the property were your own home. The period when your sister lived in the house is exempt from CGT, as is the final 36 months of ownership.

As you sold the property within three years of your sister's death, the entire gain will be exempt. There is no need to claim it as your principal private residence.

If you had planned to keep it as a long-term second home, you and your husband could have elected it as your main residence, but this could have jeopardised relief due on your current property. Don't forget that a married couple or civil partners can have only one residence qualifying for exemption between them.

Dependent relative relief will not affect the CGT relief due when you sell your own home.