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 April 2004. Older articles are accessed through our main Property Tax page.

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Both my parents were 80 last year and have signed up to an equity release scheme. Until then their sole income was their state pension and, as a result, they had exemption from council tax. However, since they started receiving £500 per month through the scheme they now have to pay the council tax in full - a sum of £1,000+ per annum. The local council say that equity release payments are treated as income for council tax purposes but I find this hard to believe as the monthly payments will all have to be repaid with interest on the sale of their home. Is this correct?

Maggie Fleming writes:

Entitlement to benefits is a very complex issue and the legislation changes frequently. Changes were made last October that have made council tax benefit, which is closely linked with the new pension credit, more generous for the over-65s. You do not say whether or not your parents have applied for pension credit. It may be worth their while to do so.

If the income they receive takes the form of an annuity (this type of scheme is often called a home income plan), they are unlikely to qualify for the benefit. If the plan is a reversion scheme or roll-up scheme, however, the income may not be annuity-based and that would not be taken into account in working out their entitlement to pension credit. If they were awarded the guarantee element of pension credit, they would automatically qualify for council tax benefit, too.

I suggest that you find out from the provider whether or not the equity release income is annuity-based. If it is not, you should ring the Pensions Service on 0845 606 0265 to discuss the matter.

My husband and I bought a house in Newcastle in 1984, where we worked and brought up a family. In 1998 our jobs moved and we bought a house in London where we both work, with the place in Newcastle occasionally housing a member of the family. My husband continues to pay council tax in Newcastle and remains on the electoral register, while I moved totally to London.

We are now thinking of selling the London house and moving back to Newcastle. We have not declared either property as our main residence. For the purposes of capital gains tax (CGT) should we inform the Inland Revenue now or wait until we sell and try to sort out any issues then?

Maggie Fleming writes:

A married couple can have only one property qualifying for CGT principal private residence relief at any one time. Where they have two residences available to them, they can elect for one of these to be treated as their main residence, even though that may be the property where they spend less time. The election must, however, be made within two years of acquiring the second property.

As you did not make the election in time, the question of which house qualifies for relief is a matter of fact. On the facts you have stated, it sounds as though the London house should be considered your main residence, as you have spent most time there. This will carry more weight than the fact that your husband continues to pay council tax in Newcastle and is on the electoral register there. Indeed, it may be that the Newcastle property could never have been regarded as a residence at all after 1998, as you do not mention staying in the property after that time.

If you are satisfied that the London property was your main residence throughout your period of ownership, the gain will be exempt from CGT and does not have to be declared on your tax returns when you sell it. If you ever sell the Newcastle property, the gain relating to the period when you were in London will be chargeable either in whole or in part, depending on when you sell.

I am an expatriate looking to buy a house in Britain to use as my main residence upon my return in some 18-24 months' time. Am I liable to pay Stamp Duty on a house? After all, this a tax and the USA and UK have the double taxation agreement based upon the Washington Treaty. If I am liable, I suspect that I will be able to claim this as Foreign Tax paid. Am I right?

Maggie Fleming writes:

I asked the Stamp Office about this matter. They are not aware of any measure which would exempt you from Stamp Duty Land Tax on the purchase of a residential property in the UK. Nor could I find any mention of Stamp Duty in the UK/US double taxation agreement. It may well be that the US will grant unilateral relief for Stamp Duty paid but this is a matter that you will have to take up with the Internal Revenue Service (IRS).

You will be pleased to learn that, despite some fears to the contrary, the Chancellor of the Exchequer did not increase the rates of Stamp Duty in his recent Budget. The duty starts at 1 per cent for properties purchased for between £60,001 and £250,000. For properties bought for between £250,001 and £500,000, the rate is 3 per cent and it rises to 4 per cent for properties costing more than £500,000.

We are considering building an annexe to our property so that my elderly parents can live with us but in their own self-contained accommodation. In order to finance this project we would need to use some of the proceeds from the sale of their house. Are there any tax implications that we should be aware of, both when they provide the money for the annexe and when they die, or if we were to move house, taking the parents with us?

Maggie Fleming writes:

An annexe or "granny flat" of this kind built on to your property will normally be regarded as an integral part of your home and principal private residence relief will be due on the whole property on sale. The whole property will be regarded as a single dwelling house rather than two separate dwellings. I am assuming that there will be internal doors between the annexe and the main house and that, while the accommodation will be self-contained, your parents will occasionally eat with you in the main house.

Part of the gift of money made to you by your parents may be exempt from Inheritance Tax (up to £12,000) depending on any other gifts they have made in this or the last tax year. The balance will be a Potentially Exempt Transfer and will fall out of their estates provided they survive the gifts by seven years.

The property is yours and their deaths would not affect this in any way. If you move, the gain on the whole property will be exempt from Capital Gains Tax provided it was your only or main residence in your period of ownership.

In 1980 I bought a house in the Cotswolds for my elderly parents, which they lived in until their deaths. When my mother died three years ago, I decided to keep the property. Despite the travelling involved in getting there and back, the area is so pleasant that I now use it as a second home, spending most weekends and much of the summer there.

Given such a long period of time, the house has understandably risen considerably in value. One estate agent estimated that the property is now worth approximately £300,000 more than the price which I paid for it 24 years ago. However, this news has left me very worried about capital gains tax (CGT). I live in a rented cottage and even though I have now retired, I have no plans to move. As I don't own the cottage, can I claim my parents' house as my main residence and not pay tax when I come to sell the property? It seems rather unfair that I should be taxed on the house when I cannot claim tax relief for the cottage.

Maggie Fleming writes:

On the assumption that your parents were over 65 when you bought the house for them and they lived in it rent-free and without other consideration, you should qualify for dependent relative relief for the period up to your mother's death.

This relief was abolished in 1988 but transitional rules still apply where you bought a house for a dependent relative (incapacitated by old age or infirmity) and the relative lived in it prior to that date. Although the relative must occupy the property rent-free, they can still pay for everyday repairs and their own council tax without threatening the owner's entitlement to relief.

For the period since your mother's death, during which you have used it as a residence, you can make an election for it to be treated as your principal private residence. Normally, where a person has two residences, such an election must be made within two years of acquiring the second residence. It may therefore be too late for you to make the election, in which case the cottage is likely to be regarded as your main residence and relief on the house will only be due for the period up to your mother's death, plus the last three years of ownership.

If your interest in the cottage is considered negligible, however, it would be possible to take advantage of an extra-statutory concession (ESC D21) which will enable you to claim the house as your main residence from the date of your mother's death, in which case no CGT charge would arise on a future disposal.