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

There is a wealth of information on these pages. If you have a specific interest, please use our Search facility.

Isis Financial Planners offers tax planning advice as well as a Tax Self Assessment Service.

We are determined to educate our children privately and wondered how we can best use our house to help finance the astronomical bills. The property is worth about £400,000 and we have a mortgage of £150,000. Is there anything we can do to use some of this equity other than by remortaging?

Maggie Fleming writes:

If you have not planned for school fees in advance, and don't have enough time left to save the money required, it is likely that you will need to remortgage.

With the mortgage market currently as competitive as it is, you should be able to find an arrangement that suits you. Flexibility is the order of the day. Some lenders will let you have a "reserve" on top of the amount you borrow initially. You do not pay interest on the reserve amount until you draw it down. Usually, however, you pay a higher rate on the reserve than on the main loan.

The alternative is to borrow more than you need and put the excess into an account, paying the best rate of interest you can find - likely to be an internet-operated or telephone account. Or you could have an "offset" mortgage, where the money you save is set against your borrowings in order to reduce the amount you pay interest on.

Remortgaging need not be a huge hassle. In their zeal to get your business, many lenders will offer free valuation and legal fees. There are two things to watch out for. One is the mortgage indemnity guarantee or mortgage insurance premium (MIP), which some lenders charge when you are borrowing a high proportion of the value of the property. The other is extended tie-ins, where you are locked into the loan for five or six years by the threat of huge penalties. A financial adviser will be able to help you avoid both.

I am about to retire and have a tenanted property which I wish to dispose of but which will create a large Capital Gains Tax liability. If I have this property valued and give it to my nephew, who then sells it at that price, does this solve the CGT problem? What if he then gives me back some of the money?

Maggie Fleming writes:

Alas, your plan will not work. Where a disposal is not by way of a "bargain at arm's length", the disposal is deemed to take place at market value. This rule applies to gifts and to any transactions which are not on normal commercial terms - i e where there is an intention to confer a gratuitous benefit on the other party to a transaction. Clearly, what you propose would fall into this category.

The Revenue would calculate the gain based on the difference between the price you paid for the property and the price it could now be reasonably expected to fetch on the open market - it is likely that this would have to be agreed between your accountant and the district valuer. The usual exemptions and reliefs, such as indexation allowance, taper relief and the annual exemption, would apply and the balance would be taxed normally. If you had ever lived in the property as your only or main residence, further reliefs might apply. Your nephew would be deemed to acquire the property at its market value.

For CGT purposes, the end result, for you, would be exactly the same as if you sold the property direct to a third party for its market value. There is, therefore, no point in going to all this trouble for nothing. You may have to bite the bullet and pay the tax bill. If you are married, gifting a 50 per cent interest in the property to your spouse prior to sale would reduce the tax liability considerably.

I own my own home. In addition, I have a legal charge of 50 percent of the value of my boyfriend's home. I am not named on the deeds so, when he sells in about a year, I anticipate that I will be liable for Capital Gains Tax (CGT) for any excess over my annual exemption. The excess would be about £25,000 at the current time, but if he extends the property, this could be as much as £40,000. How could my Capital Gains Tax liability be minimised?

Maggie Fleming writes:

You will need to seek professional help on this matter, as it will depend on the exact nature of your arrangement. Your boyfriend's name is on the deeds and he is therefore the legal owner of the property. Normally, this would mean that he is also the beneficial owner of the property and therefore potentially liable for the tax. Usually, having a legal charge over a property does not convey beneficial ownership and merely puts one in the same position as a mortgage lender. If that is the case, you will not be liable to Capital Gains Tax and your boyfriend will be exempt if the property has been his only or main residence throughout his period of ownership.

However, a charge is usually expressed as a fixed amount, not as a percentage. It may be that the reality of your arrangement is that you have put up half of the money for your boyfriend to buy the property in his name in return for a half-share of the proceeds on sale. If that is the case, the law may imply that a "bare trust" exists, with your boyfriend having beneficial ownership of half the property and holding the remaining half as bare trustee for you. In that situation, you would be liable to tax on your share of the gain in the normal way. Matters would be more complicated if he extends the property: who is paying for the extension?

A careful study of the documentation and other evidence will indicate which is the correct tax treatment.