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

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

My wife inherited her mother's flat in 1999. It was valued at £65,000 in probate. The flat has since been successfully let and we plan to keep this arrangement going for the foreseeable future, probably beyond the 10-year maximum capital gains tax (CGT) taper-relief period. It is now worth about £130,000 and is thus a fairly weighty CGT burden.

If my wife gifted the flat (which is in her name) to me at its current value of £130,000, and I was to sell it in the future, would any CGT liability be calculated on the gifted value of £130,000 or the original value of £65,000 at the time of the 1999 inheritance?

Maggie Fleming writes:

In the circumstances you outline, effectively you would take on your wife's base cost of £65,000. For taper relief purposes, you would be able to claim relief for the period during which your wife owned the property as well as the period during which you owned it.

What these special inter-spouse transfer rules mean is that it does not matter which one of you sells the property - while there is no tax to pay on the transfer between you, there is also no free uplift of value.

Have you thought about holding the property jointly? That would mean that you could each make use of your annual exemptions (£7,900 per person) and any unused portion of your lower or basic rate bands on disposal of the flat.

It may be that you are reluctant to do this if you earn more than your wife and your half-share of rental income would be taxed at a higher rate than your wife is currently paying. That is a valid point while you continue renting it out but when you do decide to sell it, it may be worthwhile for your wife to gift a 50 per cent interest in the property to you prior to sale.

You will have to do the calculations at that time to see if it is to your advantage - it will depend on the size of the personal exemptions then available and your and your wife's marginal tax rates.

Several years ago I provided half the purchase price for my son's flat, which he then bought in his own name. We decided to enter into a trust for sale so that, on any sale, half of the net proceeds would be passed to me.

The Land Registry records him as the sole owner, with the trust shown as a restriction on sale. However, the trust document refers to my son as holding the property on trust for him and myself as joint tenants. Does this latter reference mean that I am potentially liable to tax on 50 per cent of any capital gain when we come to sell?

Maggie Fleming writes:

You are liable to capital gains tax (CGT) if you have a beneficial interest in property - in most cases, the person with the legal interest also has the beneficial interest but this is not invariably the case.

You should check with the solicitor who drew up the documents to the flat but it sounds as though you do have a beneficial interest in the property and will therefore be taxed on 50 per cent of any gain on sale. Your son's share of the gain will qualify for principal residence relief but yours will not.

However, if you are married, you may find it sensible to rearrange matters so that your spouse takes over part of your interest in the property.

In England and Wales (but not in Scotland or Northern Ireland) joint tenancies can only exist under trust. This takes the form of what is known as a "bare" trust. Your son is trustee for both himself and you. He has legal ownership of the flat but you each have beneficial ownership.

Interestingly, the law can imply that a bare trust exists in a situation where one person (A) uses his money to buy an asset in the name of another person (B). In that situation, B would be bare trustee for A, and A would be liable to CGT on sale.

There are exceptions, though. This would not apply if A and B were husband and wife or parent and child, as it would be assumed that A had made a gift to B, or if the purchase arrangement were clearly a loan.