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

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We recently had a loft conversion carried out on our home. The building firm who did the work quoted us £11,765 plus Value Added Tax (VAT) of £2,060.

We have since found out that the firm is not registered for VAT purposes and had this confirmed by way of a telephone call to the local Customs & Excise office. We do not feel that we should be obliged to pay the VAT element of this bill. Could you please advise us of our liability in this respect?

Maggie Fleming writes:

If this firm is not registered for VAT, you have no liability to pay it. But double-check your facts first before taking action – ask the builders for a VAT number and check this with Customs & Excise. Even if the firm has a registration application pending, it is not supposed to charge VAT until it has been issued with a number.

The current VAT registration threshold is £58,000 and it will not take many loft conversions to reach this limit. It is therefore likely that the firm should be registered. You have obviously harboured doubts about it for some time.

VAT dodgers are also more likely than honest workmen to be cutting corners generally and you may want to check up on their work. The local authority building inspector should have visited the site and checked the structure, drainage, insulation and ventilation before issuing a completion certificate. You may want to ring him to make sure that the work was inspected and found satisfactory before you pay the builders anything.

Customs & Excise has a hotline, Customs Confidential, where you can report VAT fraudsters. The number is 0800 59 5000.

My husband and I are planning to purchase a second property. We have two children (aged 18 and 21) and I wondered what the implications are of putting the house in all four of our names?

It would probably be a cash purchase but may have a small mortgage. If the children's share was less than 25 per cent initially, would it be possible to transfer a percentage of the share to them each year?

Presumably there are advantages as far as capital gains tax (CGT) is concerned when we eventually sell the property if it is owned by four people? Two of us are currently non-tax payers and my son may use the house as his main residence.

Maggie Fleming writes:

Provided that your lender is happy for the property to be held by four people, there is nothing to stop you doing this. The initial gift to the children will be the cash invested, so there are no CGT implications on purchase. The gift will be a Potentially Exempt Transfer for inheritance tax (IHT) purposes and provided you live for seven years after making the gift, this will drop out of your estates.

Once the property has been purchased, any transfers to your children will be liable to CGT (as well as, potentially, IHT) if the amount of gain exceeds the annual personal exemption (currently £8,200 per person), so you would each need to keep an eye on this.

There are other possibilities to bear in mind. For example, if you rent the property out and your husband is a taxpayer but you are not, it might be advantageous for you to own half the property and only transfer a share to him when the property is to be sold.

However, you mention that your son may use the property as his main residence and, if that is the case, the most tax-efficient course of action would be for the property to be in his name (subject to the lender's approval). Of course, this might not be thought desirable for other reasons.

We were told in the Budget that from April 6 residential property can be included in a private pension (PPP). Does this mean that any owner occupier can put his or her dwelling into a PPP. What about second homes and buy-to-let properties? What are the consequences for inheritance tax (IHT) and capital gains tax (CGT)?

Maggie Fleming writes:

The legislation you refer to will not come into effect until April 2006. It is part of a larger overhaul of the pensions system. Under the new rules, it would be possible for a person to put their home into their pension scheme and avoid IHT. However, there are a number of practical problems. First, the existing pension fund can only use 50 per cent of its assets to buy the property, so the fund will have to be fairly large to begin with. Also, the owner will have to pay the pension fund a commercial rent for continuing to live in the property. When he wishes to retire and start drawing the pension, the property will normally have to be sold, unless the fund is very large.

There are other questions, too, regarding jointly-held property and inheritance that need to be considered. So this measure may have very limited appeal, confined only to the very wealthy, for whom their residence is only part of a varied pension portfolio.

Of much more consequence is the fact that rental property can be put into a pension. The pension scheme will own the property but all rental income will be tax-free and there will be no CGT or IHT implications when the property is sold to provide a pension. This is clearly a good deal for landlords and is likely to encourage further investment in the buy-to-let market.

My mother is 82 and lives alone in a flat she owns outright. She has Alzheimer's Disease but at the moment can live safely on her own with close supervision from me. That could change in the future when more day-to-day care will become necessary.

My mother sees her flat as the natural inheritance for me and her grandchildren. The current value is about £125,000 and she would be upset if it had to be sold to fund the cost of long-term care. Would the transfer of the flat by my mother to me or my wife (or a grandchild, aged nine and seven) be worthwhile? I own a house (subject to mortgage) with a current value of £200,000. Are there any tax implications for my mother or me?

One option is for my mother to move in with us. We already have planning consent to extend our house to provide an additional bedroom and a downstairs toilet. The proceeds of the sale of my mother's flat would fund the extension and leave her a sum of money to make her last years as comfortable as possible. Would this be a sensible option?

Maggie Fleming writes:

If your mother transfers the property and later requires residential care, the local authority may argue she had deliberately deprived herself of an asset and treat her as though she still owned it. They would take various factors into account, including the length of time which had elapsed between the gift and the need for care. If you are considering such a transfer, you should talk to a solicitor who is familiar with the views of your local authority on this subject.

There are also capital gains tax (CGT) implications on a transfer as you would be liable to a charge on eventual sale based on the increase in value between the date of the gift and the sale, though this would be reduced by owning the flat jointly with your wife. I am not taking inheritance tax (IHT) into consideration, as it sounds as though your mother's estate is well below the £263,000 nil-rate band.

If your mother sells her flat and moves in with you, there are no adverse tax implications. Even if you extend your house to provide accommodation for your mother, you would still be entitled to full private residence relief for the property, were you ever to sell it, and it would also add to the house's value. All in all, this route seems less fraught with difficulty but you should still check with a solicitor as to what would happen if your mother ever needed to move into a care home.