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

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My father transferred ownership of his house to me in May 2001. This was dealt with properly by a solicitor and my name is on the deeds. At that time, the property was worth about £100,000. My father died recently and I am thinking about selling the house, as neither I nor any of my children wish to live in it and we don't want the hassle of renting it out. However, it is in a fairly dilapidated state and I would like to carry out extensive building work on it before sale to get a better price. Would I be able to claim the cost of this work for Capital Gains Tax and how would the tax be calculated? The house is now worth roughly £135,000.

Maggie Fleming writes:

You can deduct enhancement expenditure of a capital nature that is reflected in the state of the property at the time of sale. It sounds as though the renovations you are planning will fall into this category and therefore their cost can be deducted from the disposal proceeds to arrive at the gain. You can also deduct the market value of the property at the time your father gifted it to you and any of the legal costs paid by you. The incidental costs of disposal are also allowable - legal, estate agents' and valuation fees.

In addition, once you have owned the property for three years, you will be able to reduce the gain by 5 per cent taper relief for every subsequent year until sale, up to a maximum of 40 per cent relief after 10 years. In the current tax year, the first £7,900 of the gain will be exempt and this exemption is normally increased each year. If you are married, you can gift a 50 per cent interest to your spouse before sale to make use of his or her exemption as well, thereby doubling the tax-free gain to £15,800.

After all exemptions and reliefs have been taken into account, the chargeable gain remaining will be taxed at 10, 20 or 40 per cent depending on your level of income in the year of sale. If you have gifted a 50 per cent interest to your spouse, you will each have to pay tax on half the gain and will both be able to make use of any unused portion of your lower and basic rate bands.

My brother was given an inheritance that allowed him to live in my parents' home until his death after they had died. What is this called? What value does this gift have at the time of their death? Would he be able to subtract the value of this gift from the value of the property?

Maggie Fleming writes :

Your brother was left a "life interest", also known as an "interest in possession" in the property. This is a type of trust and means that the person with the interest in the property - usually called the "life tenant" - has a right to enjoy it but has no right to the capital and therefore is not free to sell it or leave it to someone. When he dies, it will pass in accordance with your parents' wishes, not his, either to another life tenant or to someone who will own it absolutely.

Presumably, your brother inherited the property through the will of the last parent to die, by operation of a will trust. The full value of the property at that time would have been included in that person's estate. Likewise, when your brother dies, he will be treated as if he were beneficially entitled to the property and its full value will be included in his estate. It does not matter for Inheritance Tax purposes that he did not own the property absolutely.

We have lived in our present house for nearly 45 years, and it is now in our joint names. What are the advantages - or otherwise - of changing to being tenants-in-common? We have been told that it might be beneficial should either of us have to go into long-term care in the future and that there could be tax benefits, too.

Maggie Fleming writes:

From an Inheritance Tax (IHT) point of view, it is often recommended that married couples own their homes as tenants-in-common. The reason is so that each spouse can make use of the nil rate band (currently £255,000) on death without giving away cash or other income-producing assets needed to fund living costs. The nil rate band is that part of a person's estate which is not taxed.

As tenants-in-common, each spouse can will their share of the family home to their children, either absolutely or using a trust structure. This uses up all or part of each nil rate band.

Joint tenants cannot will their share away from each other in this way. This means that the nil rate band of the first to die is wasted and the entire property ends up in the estate of the surviving spouse. When the survivor dies, any excess of the estate over £255,000 is taxed at 40 per cent.

Had the first spouse passed property worth £255,000 to the children instead, inheritance tax of £102,000 could have been saved. The children may have a Capital Gains Tax liability on eventual sale of the property but this is likely to be small.

Your solicitor can sever the joint tenancy and register you as tenants-in-common easily. He/she will also be able to advise you on the implications of these arrangements for long-term care in your area.