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 November and December 2003. Other articles are accessed through our main Property Tax page.

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I am 80 years old and my wife is 76. We are living in our own house, mortgage-free. However, the time might come when we want to move to a retirement home. In this case, the house would cease to be our main residence, and we might also decide to let it. What can we do to minimise the tax obligation of our children when they become our heirs?

Maggie Fleming writes:

To advise you properly, I would need to know more about your individual circumstances: what is the value of the house and of your total estates? On the assumption that the house has a substantial value, however, you may wish to ensure that it is held in the most tax-efficient way.

You do not say if you own it jointly but, if not, you should arrange this. You should also ensure that it is held as "tenants in common" and not (as is more usual) as "joint tenants". If you hold it as joint tenants, you should sever the joint tenancy.

The advantage of being tenants in common is that you can each will your half of the property to your children, either directly or via a trust. This ensures that the nil rate band of the first to die is not wasted, as it would be if the deceased's share passed to the surviving spouse.

Owning the property jointly will also be advantageous if you decide to let it, because (depending on your other income) you can each use any unused income tax allowances and lower rate bands against the rental income.

Furthermore, should you decide to sell the property after letting it for a while, you will each have your personal exemption (currently £7,900) to set against any Capital Gains Tax due, as well as the extended relief of up to £40,000 per person where a former main residence is let as residential accommodation.

I have a house worth more than £500,000 and little other capital. My wife has resisted suggestions that we sell and move to a smaller and more convenient house, but she now sees the sense of this. Neither of us is in robust health, and we are both over 65. I would like to leave some capital to my daughters, who have none, but am worried that even if we sell soon, we will both have to live for 10 years to see the capital passed without a huge tax bill. I hate the idea of the government squandering my capital. Is there anything that could be done immediately to lessen the risk of tax?

Maggie Fleming writes:

You say that you have a house. I am therefore assuming that the house is owned in your sole name and not jointly. Therefore, you are over the inheritance tax nil rate band of £255,000 and your estate would have to pay 40 per cent tax on the excess - about £98,000 - unless you left the house to your wife (assuming she survives you), in which case the tax would be payable on your wife's death instead of yours.

The remedy is to equalise your and your wife's estates, so that you each own about £250,000 - below the nil rate band. This can be done whether or not you move house. You simply ask your solicitor to arrange matters so that you each own a 50 per cent interest in the house as tenants in common. This means that you can each will your interests in the property to your children, thus removing £250,000 tax-free from your estates on each death. The legacies can be outright gifts or subject to a trust arrangement - your solicitor will advise you on this. If you hold the property as joint tenants, the joint tenancy will have to be severed before you can do this.

If you sell the house and have spare cash, give half to your wife, as this will form part of her estate on her death, together with her half of the new house. If you find that you each have assets totalling more than the nil rate band, remember that you can each gift £3,000 per annum, tax-free. For larger gifts to fall out of your estate, you need to survive for seven (not 10) years.

In October 2002, I sold a barn, which stood in my garden, for £175,000 and had, until that date, been used for storage and garaging. About .22 acre of my garden was included in the sale. The remaining garden is about 0.7 acre. My accountant was unclear whether this would incur a Capital Gains Tax (CGT) liability. He has now sent me a copy of my tax statement, on which he has stated that the barn and grounds are within the permitted area of 0.5 hectares, and as such are covered by the principal private residence exemption. He also tells me to bear in mind that on any subsequent disposal of my main residence the permitted area qualifying for redemption will be reduced to 0.78 acre. Anything over this will be treated as forming part of the four acres of agricultural land still owned by me which, if sold at the same time as the main residence, will produce a possible chargeable gain. The house and four-acre field are now on the market at £465,000, having been bought for £220,000 in 1996. I am now totally confused as to what costs I will incur. Can you clarify the position?

Maggie Fleming writes:

The CGT exemption applies only to the house and land held as "garden or grounds". The field will therefore be fully chargeable to capital gains tax on sale. The gain will be calculated on the growth in value since you bought it. It is likely that a value was agreed with the Inland Revenue in 1996.

Just because the garden and grounds is more than half a hectare does not mean that, on a subsequent sale, part of your garden will be aggregated with the agricultural land and charged to tax. The permitted area is 0.5 hectares or that larger area required for reasonable enjoyment of the house, having regard to its size and character. If there is a genuine case to be made for a larger permitted area, your accountant should make it. This is something that will have to be negotiated with the district valuer on sale and you should ask an experienced local valuer to help you prepare your case. As you bought the property relatively recently, you may also be able to contact the previous owners to find out how large a permitted area was agreed with the Revenue when they sold it. This is a very contentious area - you may be in for a lengthy negotiation.

I already own a house and have a one-third share in a smaller, second one, bought four years ago with my partner as tenants-in-common. The second house has almost doubled in value, leaving me with a small Capital Gains Tax (CGT) liability, should we sell. To eliminate my liability, can I give my partner a third of my share in each of three years, each gift comprising £7,500 of the original price plus £7,000 allowable capital gains. (I am aware of the tax implications for her should I die within seven years of making any one gift.) If this is within the rules, should I notify the Inland Revenue of each gift to avoid problems when we do sell the house?

Maggie Fleming writes:

I assume that you have a good reason for gifting the property to your partner - can a claim be made that it is her principal private residence if the property is sold? Or is it that you are taxable at the higher rate and she is not? The disparity in rates may not compensate for the loss of one annual exemption - if your partner will be liable to CGT on sale, you should check the figures carefully to make sure that you are doing the right thing.

Assuming that it does make sense to gift the property, there is nothing wrong with the way you propose to do it. Each annual gift will be potentially liable to CGT, based on the difference between market value and purchase price, but if you calculate it correctly, this will be covered by your annual exemption. You should ensure that each gift is dealt with by a solicitor.

Strictly speaking, under self-assessment, you do not have to disclose details of any disposal where the value of the asset is less than double the annual exemption. However, as you will be relying on a valuation, it would be safer to provide the Inspector of Taxes with a calculation, so that he can, if necessary, check the market value you have given. As this will be a fairly complicated "part disposal" calculation, you should also engage a tax practitioner to prepare it.

I recently bought a house with my mother which she lives in as her main and only residence. I am married and live with my wife in a different house. My mother and I each own 50 per cent of the house and we have a tenants-in-common agreement in place. I do not have a mortgage on the shared house but I do on my marital home. Can you advise how I can avoid or minimise any tax that may become due on sale of the shared house, either now or in the future, should my mother die?

Maggie Fleming writes:

The taxation consequences of your present situation are that, if the house is sold, either because your mother wants to move or after she has died, there will be no Capital Gains Tax (CGT) liability on her half of the house. Your mother's interest in the property will form part of her estate on death and, if its value, together with that of her other assets, exceeds the nil rate band (currently £255,000), there will be an inheritance tax charge of 40 per cent on the excess.

If you sell your share of the property (either during her lifetime or immediately after her death), you will be liable to Capital Gains Tax (CGT) on the growth in value of your share, less the usual allowances and reliefs.

I cannot advise you on Capital Gains Tax (CGT) planning in isolation, especially as I do not have the full picture regarding your family's financial position. You should consult a professional adviser, who can look at your and your mother's circumstances in detail and advise accordingly.

One simple way of mitigating a future Capital Gains Tax (CGT) charge, however, would be to gift part of your share of the property to your wife. That way you would benefit from two annual exemptions (currently £7,900 per person) on eventual sale of the house, rather than just one.

My former partner and I own a house in which we lived together for a number of years, until our relationship broke up. At the time of the split, we had considerable savings, which we had intended to use to buy a small flat to rent out as an investment. Following the relationship breakdown, we went ahead with the purchase of a flat and my ex moved into it instead. Both properties are jointly owned and we always intended to sort this out but never did. Now, she is planning to sell the flat and I think I may have to pay Capital Gains Tax (CGT) on my half of the property, as it has never been my residence. Is there anything I can do to reduce this? I assume that she, too, would have a tax liability if I sold the house at some point in the future, also.

Maggie Fleming writes:

From the information you have given, it sounds as though you may be able to benefit from an Inland Revenue concession, allowing you to exchange your interests in the properties without suffering a charge to Capital Gains Tax (CGT). Without this concession, if you exchanged interests, you would each be deemed to have made a disposal of your half of each property at market value and tax would be charged as normal on the increase in value on each half share since you purchased the properties, after the usual allowances and reliefs.

If the concession is applied, there would be no charge on the transfer and you would each end up owning 100 per cent of the property you actually live in. As a result, each of you would be entitled to full exemption from Capital Gains Tax (CGT) on the sale of your property, as each would qualify as your only or main residence. For Capital Gains Tax (CGT) purposes, you will be treated as though you had bought each property on your own at the original date of acquisition for the original cost.

It is likely that the flat is worth less than the house and it would be possible for you to make a capital payment to your former partner in recognition of this disparity without jeopardising the relief.

This concession only applies where the properties have been used throughout your whole period of ownership as your residences.