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 2005. Older articles are accessed through our main Property Tax page.

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In a response to an earlier Clinic query, you indicated that, when a property is sold, it may be better to have it in joint names to reduce capital gains tax (CGT). You said then that a husband and wife could transfer property between themselves at any time without any CGT consequences.

We are trying to sell a holiday flat which is now in my wife's name; at the moment we pay less income tax in her name than we would if it were jointly owned. Is there a period before a sale when we should put the property in joint names or can this be done shortly before the sale, so minimising income tax but also reducing CGT, as against the position if the flat stayed in my wife's name? We have been told that to do this close to a sale would cause the Inland Revenue to claim that it was tax evasion and consequently they would effectively nullify the transaction.

Maggie Fleming writes:

Although the Inland Revenue have boarded up a lot of loopholes in recent years, they still seem relaxed about inter-spouse transfers followed by sales of the assets concerned. It has been standard practice for years in the accountancy profession to recommend that spouses transfer assets between themselves prior to sale to make use of both their annual exemptions.

Obviously, the Revenue could look carefully at any transaction if the notion took them, so it makes sense to ensure that the transfer into joint names is effected properly and is an outright gift with no strings attached, but I think it highly unlikely that they would scrutinise this transaction. I note that you have already done some sensible tax planning by holding the property in your wife's name in order to reduce your family's overall income tax liabilities.

Legislation does exist which could in certain circumstances deem a gift between spouses to be a settlement, with the result that the income produced by the gifted asset is treated as the donor's for income tax purposes. But provided that it is an outright, unconditional gift, this would not apply.

My late mother gave her house to my brother and me in 1994 but continued to live in it. I understand this to be a "gift with reservation" and, as such, it has been included in her estate for Inheritance Tax (IHT) purposes.

Clearly, the value of the house has increased since 1994 and we are led to believe that, when the house is sold, we shall also have to pay Capital Gains Tax (CGT) on the difference between the value of the house in 1994 (the "antecedant value") and the price at which it is eventually sold. Is this correct? It would appear we are being taxed twice on the same asset.

Equally, we have received conflicting advice as to whether it is acceptable to the Inland Revenue for our spouses' CGT to be used. Is this really a "grey area" or is there a clear ruling?

Maggie Fleming writes:

Unfortunately, because your mother remained living in the house, she fell foul of the IHT gift with reservation of benefit rules and the gift therefore failed. Instead of falling out of her estate after seven years (the normal position with gifts), it was deemed to form part of her estate and the estate was taxed on the value at death.

However, while the gift failed for IHT purposes, it succeeded all too well for CGT purposes and therefore you and your brother are liable to CGT on the growth in value since 1994. There are several reliefs available - indexation allowance and taper relief (a 30 per cent reduction of the gain if you sell the property in the current tax year). You can also obtain deductions for the incidental costs of sale (legal costs, estate agent's fees etc) and the cost of any substantial capital improvements carried out since 1994, provided that these are still apparent in the state of the property.

I see no reason why you should not each transfer half of your share to your respective spouses in order to make use of their annual CGT exemptions. Provided that there are no strings attached and they are genuine outright gifts, the Inland Revenue has, in my experience, no problem with this type of arrangement.