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 August 2003. Older articles are accessed through our main Property Tax page.

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My elderly in-laws reside in a former council-owned property in North Wales, which they purchased several years ago. Their only child, my late husband, died 13 years ago. Consequently, my three teenage daughters are their closest living relatives. On their death, my in-laws are planning to leave their property to my daughters, currently all aged under 21. What is the most tax-efficient way to do this? My in-laws recognise that their granddaughters would wish to dispose of the property at the earliest opportunity, the current value of which would be £50,000 or less.

Maggie Fleming writes:

I would like to know more about your in-laws' total wealth. Assuming that the property is their only major asset, there will be no inheritance tax liability on either death and there is no need for tax planning on their part. Your daughters would inherit the property at probate value on the second death and, if they sold the property soon after, they would not have a capital gains tax liability either. Even if they delayed selling it and the property rose in value, it would have to increase very considerably before any gain would become chargeable, because each of your daughters would be entitled to set the annual exemption (currently £7,900) against her share of any gain.

If your daughters are under 18 when the last surviving in-law dies, the law will impose a trust. If the property is left by will as a "vested" gift, the trustees, on selling it, will be able to make use of each child's annual exemption - the end result for taxation will therefore be exactly the same as if the children had owned the property outright.

All in all, I see no tax liability arising either for your in-laws' estate or for your children.

Twenty-five years ago, I inherited a half share of an acre of greenbelt land with a nominal value of £500 for probate. It now appears that developers can get planning permission, together with surrounding land (not mine). The half acre now has a projected value of £200,000. I would appreciate your advice on how best to minimise any tax that will be involved. I am a non-taxpayer with married pension plus savings.

Maggie Fleming writes:

Whatever you do, you are going to face a large Capital Gains Tax (CGT) bill. The best thing to do is to gift a half share in the land to your spouse. In this way, you can make use of two annual exemptions (currently £7,900 per person) and two basic rate bands.

You will also need to have the land valued as at 31 March 1982. If its value at that date was more than £500, you can substitute that higher value in the tax calculation, thus reducing the gain. You should explain to the valuer that the valuation is required for CGT purposes. Most assets benefit from this "rebasing" at March 1982 value but land is often the exception, as there was something of a slump at that time - you need to investigate this matter, however. The valuation you propose will need to be negotiated with the District Valuer.

The usual reliefs apply - indexation allowance up to March 1998 and taper relief thereafter. As the base cost is likely to be low, the indexation is unlikely to be substantial. Taper relief will be much more useful, as it will reduce the gain by 20 per cent. However, after all reliefs and allowances have been given, you and your spouse will still have a substantial gain.

Four years ago I bought a house for my daughter and her two teenage daughters, as she was divorced with no maintenance. Since then, the value of the house has increased a lot and will seriously affect my Inheritance Tax (IHT) liability - I am way over the nil band rate now. I propose to give the house to her and hope to live for seven more years (I am in my late seventies now). Can I leave the house to the three of them in varying proportions to avoid any chance of my daughter marrying again and my granddaughters being deprived of their inheritance?

Maggie Fleming writes:

You will need to talk to a solicitor about this matter. You can gift the property to your daughter and granddaughters in any proportions you wish but you cannot make an outright gift of land to a minor - the law will impose a trust.

In any case, a trust sounds ideal for your purposes: your daughter could enjoy the property for her lifetime but it would pass on her death to her children absolutely. Alternatively, a share of the property could be held on accumulation and maintenance trusts for your grandchildren, while your daughter holds her share absolutely.

However, while surviving seven years from the date you make the gift will solve your IHT problem, you may have overlooked another tax - on making the gift you will be liable to Capital Gains Tax (CGT) on the difference between its current market value and its cost four years ago (less various allowances and reliefs). The worst-possible case would be if you made the gift and died shortly afterwards - you would face both a CGT and an IHT liability on the same property. Seek professional guidance.

Seven years ago, I sold my house in Scotland and bought one in Bolton. I have since remarried and live in my new husband's house. My son and his partner still live in the property which I bought. They now wish to move. As the house is still in my name, how much Capital Gains Tax might I have to pay and is there any way of reducing it? It cost £26,000 in 1995 and would now probably fetch £60,000.

Maggie Fleming writes:

You have not given me enough information to calculate the likely gain. I don't know how long you were living in the Bolton house but I assume that you occupied it as your only or main residence before you remarried.

If that is the case, the gain of about £34,000 (reduced by the incidental costs of acquisition and disposal, such as stamp duty, solicitors' and estate agents' fees, and by indexation allowance for the period from acquisition to April 1998, when it was replaced by taper relief) will be apportioned between periods of occupation and periods of absence. The past three years of ownership are deemed to be years of occupation and will always be exempt.

For example, if you lived in the property as your home for two years before your marriage, five of the seven years of ownership would be exempt - ie, the two years you actually lived there plus the final three "deemed" years. In this case, only 2/7ths of the gain would be chargeable. Assuming the gain had been reduced to £30,000 by the reliefs outlined above, this would leave broadly £8,500 chargeable. This would be reduced by 20 per cent taper relief to £6,800, which is comfortably under the annual exemption.

I have assumed that your son and his partner occupy the property informally but if it is "let" to them and the income declared on your tax return, you would be entitled to further relief. I suggest you engage a tax practitioner to look at all the facts and prepare the calculation.