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

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I am a widow of 70 with a flat worth £250,000. My married daughter has invited me to live permanently in her house. If I sell my flat and share the proceeds evenly between my three children, will the share to the daughter who had offered me a home be a potentially exempt transfer (PET), or would be seen as a gift with reservation of benefit? I would pay my share of the bills and running costs, but would not have any ownership in her house. I have made PETs previously.

Maggie Fleming writes:

This arrangement is fine. The gift with reservation of benefit rules would apply only if you gifted your flat to one or more of your children while continuing to live in it. The rules do not apply where the property is sold and the proceeds distributed to your children.
The fact that one of your children is offering you a home does not adversely affect the poison. These cash gifts will be PETs and, under current legislation, will fall out of your estate provided that you survive for seven years after making them.

Furthermore, on the assumption that the flat has been your only main residence throughout your period of ownership, you will have no Capital Gains Tax, liability on its sale. Nor will your occupation of your daughter’s property affect her entitlement to principal private residence relief on eventual sale of her home.

Going one step further, it would eyen be possible for you to sell the property, give the proceeds to your children and for them to then purchase a replacement home for you to live in. The Inland Revenue might look twice at such an arrangement but would have difficulty in applying the reservation of benefit rules. In that situation, however, the children would suffer a Capital Gains Tax charge on eventual sale of the property.

My elderly parents, 85 and 90, live 150 miles from my home. We have discussed them selling up and using part of their capital to buy a joint property with my wife and l, so that they can live with us in the knowledge that they will be comfortable and looked after until they die. The value of their property is about £300,000 and ours £200,000. I envisage we would be using the full proceeds from the sale of ours and probably an equal sum from theirs. How would their share be viewed from a tax point of view when they die?

Maggie Fleming writes:

I assume that each of you will own a 25 per cent interest in the property as tenants-in-common and that each of your parents will bequeath their share to you and your wife. If that is the case, on the death of either, the market value of his/her share will be added to his/her other assets to determine the total value of the estate. If this is below £250,000 (the nil rate band for 2002/03), there will be no Inheritance Tax (IHT) charge. If it is more than £250,000, the balance will be taxed at 40 per cent.

I do not know the full extent of your parents' wealth, but if their total assets exceed £500,000, they should each endeavour to ensure that they leave £250,000 to their children and grandchildren, so as to make use of both inheritance tax nil rate bands. Unfortunately, married couples often leave everything to each other with the result that, while there is no tax to pay on the first death, the tax bill on the second death is unnecessarily boosted by up to £100,000. As you and your parents are putting in equal amounts, there is no question of a gift being made. Nor are there any Capital Gains Tax implications as you will each be using the property as your only main residence. You should consult a solicitor about the matter – it may be sensible for the four of you to draw up a legal agreement regarding the ownership and this would also be a good time for your parents to review their wills.

I want to buy a second property while my first is up for sale. If I am unable to sell the first until some time after I have completed on the second, what are the Capital Gains Tax implications?

Maggie Fleming writes:

Provided that you sell the first property within 36 months of leaving it, you do not have a problem. Where a property has been your only or main residence at any time, the last 36 months' ownership are always covered by the principal private residence exemption. This applies no matter what you do with the property - even if you rent it out.

This provision was introduced to help people who were moving but having trouble finding a buyer for their old home. Originally, the permitted "overlap" period was only 12 months. At the start of the 1980s, it was doubled to 24 months, where it remained until the property market crash in the early 1990s, when the then Chancellor, Norman Lamont, increased it to its current 36 months in his 1991 Budget.

The aim was to try to stimulate the market by making it less likely that a Capital Gains Tax (CGT) charge would arise on moving home. The 1991 legislation gave the Treasury the power to change the exempt period back to 24 months by statutory instrument but no government has yet exercised this power. It has promised that it would not be used retrospectively and that adequate notice would be given.

My wife's very elderly aunt recently entered a nursing home and was obliged to put her modest house on the market in order to pay the fees. During the transaction to sell her house, she died. My wife, as the sole beneficiary under the will, now inherits the house, and as such the proceeds (£100,000 net) of the sale, which is still in train. Is my wife now liable to pay Capital Gains Tax on the property? And if so, how much?

Maggie Fleming writes:

The short answer is no, your wife will not be liable to Capital Gains Tax on the sale of the property. The reason is that a beneficiary under a will generally acquires the willed assets at their market value at the date of death - in other words, probate value. I assume that the house is being sold for market value and therefore the sale price and your wife's acquisition cost will be the same. There would only be a gain if the property sold for more than the probate value.

You do not say precisely what stage the sale was at when your wife's aunt died. For the purposes of Capital Gains Tax, the disposal takes place at the date of the contract, not; completion. If contracts were exchanged before her death, the deceased will technically have disposed of the property for Capital Gains Tax purposes, although there will be no tax liability if it was her only or main residence throughout her period of ownership. If that is the case, your wife will have inherited cash instead of a house and there is, of course, no Capital Gains Tax liability on cash.

As death wipes out capital gains and there is a "free uplift" to market value of the assets passed on to legatees, it is worth noting that people with a short life expectancy should avoid selling assets pregnant with gain, as these will attract Capital Gains Tax. This will not happen if they are willed instead.