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 May 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.

You have given advice on reducing the amount of Inheritance Tax (IHT) payable on property by leaving a half share to your children. However, what happens when the value of the half-share is greater than £255,000? Our house has recently been valued at £1.3 million, which means that if we each leave a half-share to our children, they will be faced with Inheritance Tax of £160,000 (40 per cent of£400,000), which neither they nor the survivor will be able to pay. Can one leave less than a half-share? Even 20 per cent would involve some tax being payable.

Maggie Fleming writes:

In order to gift an interest in your home effectively, you will have to structure your ownership of the property as "tenants in common". If you are currently "joint tenants", you should ask your solicitor to sever the joint tenancy. You will then each be able to will your interest, or part of it, to your children. This can be any percentage you wish but, if its value exceeds the nil rate band at your death, some Inheritance Tax will be payable.

This is a good way to use your home in order to make use of both spouses' nil rate bands - if your entire estate is simply left to the survivor, the first nil rate band is wasted. Of course, it would be simpler to will the £255,000 in cash form but this is often not possible.

In cases where part of the home is willed to the children outright, it is important to protect the position of the surviving spouse as far as possible. The children could be encouraged (but could not be compelled) to settle their share of the property on revertor to settlor trusts for the survivor. These have both Capital Gains Tax and Inheritance Tax advantages and would also give the survivor security.

My husband and I are amicably separated and are co-directors in a limited company. Our future plan is to separate financially in the best possible, mutually advantageous way. He lives in a flat, which is in his own name only. We both jointly own the house l live in and from which I presently run the business.
This house was purchased purely as a better investment for us both. There are small mortgages on both the house and the flat. What adjustments can we make in the next few years to make the best of the Capital Gains Tax (CGT) situation we may presently be in?

Maggie Fleming writes:

From the date of your separation, you are each entitled to have your own property on which you can each claim principal private residence relief. The ideal situation is for your husband to own the flat and for you to own the house and for each of you to claim for your respective properties. There are several difficulties, however.

The major problem is that a husband and wife can only transfer assets between themselves without giving rise to a chargeable gain in a tax year in which they are living together. After the end of the tax year in which they separate, they are treated as "connected persons" until they divorce and, as such, any disposals are chargeable and are treated as taking place at open market value, whatever money changes hands.

Therefore, if your husband sells or gifts you his half of the house, he may have a CGT charge unless the house was previously the marital home and he moved out less than three years ago, in which case he may be able to claim principal private residence relief, possibly restricted for business use.

You should also be aware that the relief is not available where a property is purchased mainly in order to realise a gain on sale, although the Inland Revenue only pursues this argument where the relief is being abused.

The best solution will depend on the particular facts. You should discuss the matter in detail with your accountant.

Having made a substantial gain on the sale of our Spanish holiday home last May, we need to know what costs can legitimately be set against it to reduce our Capital Gains Tax (CGT) liability. Obviously, legal and agents' fees are allowable, but as my wife and I were both obliged to visit the local abogado to sign the transfer documents, as well as to make arrangements for disposal of some furnishings and bring home an estate car full of contents, may we claim our travel and subsistence costs as necessary expenses? If so, is there a standard mileage allowance recognised by the Inland Revenue in these circumstances? Subsistence costs would need to be estimated because we took the opportunity to holiday while preparing the house for sale.

Maggie Fleming writes:

The legislation restricts allowable expenditure to certain categories, one of these being the incidental costs of disposal. As you rightly note, these include professional fees and also "the costs of transfer or conveyance".

If it were a legal requirement of the conveyance that you and your wife signed the transfer documents in person, you have a good case for claiming the costs of a return journey to Spain. The disposal/ transportation of contents is irrelevant, as this is not a cost of the conveyance.
A more substantial stumbling block may be the requirement that the expenditure be incurred "wholly and exclusively" for the purposes of the disposal. Your trip to Spain had a dual purpose - part business and part pleasure. Provided that the holiday was incidental to the business purpose of the journey, the inspector may be prepared to accept a claim for mileage. I suggest that you base this on the authorised rate of 40p per mile.

This is a grey area and, if you are not employing a tax practitioner to prepare your tax return, I suggest that you discuss the matter with your inspector before submitting the signed return.

You will, however, be able to claim relief against your UK tax liability for at least some of the Spanish taxes suffered. Spanish tax is complicated and I recommend that you employ a local Spanish accountant to deal with the Spanish revenue authorities on your behalf.

My husband and I jointly own our home and a flat which we have rented out since buying it in May 1991. We intend to sell our house this year and move into the flat; which will become our principal residence. lf we sell the flat after living there for about a year (maybe less), what would our Capital Gains Tax (CGT) liability be and what could we do to minimise it?

Maggie Fleming writes:

Once you have sold your present home and moved to the flat, it will be your only residence and should therefore qualify. for principal private residence relief (PPR). This means that the overall gain will be time-apportioned and at least the final three years of ownership will be exempt.

Say you move in in May this year and sell the flat after a year, you will have owned it for a total of 13 years. Three 13ths of the gain will automatically be exempt. Furthermore, there is an extended relief available where the property has been let. This exempts an additional part of the gain equal to the lowest of three amounts - the gain already exempted (three 13ths in this example), the gain attributable to the period of letting and £40,000. The usual reliefs - indexation allowance, taper relief and the annual exemption (currently £7,700 per person) are also available to reduce the gain.

You mention that you may live in the property for less than a year. There is no minimum period of residence required to qualify for PPR. It is the quality rather than the quantity of your occupation of the property that counts. While the Inland Revenue is unlikely to query a claim to the relief, it is worth noting that the courts have interpreted the legislation as meaning that you should intend it to be your permanent residence when you move in - it should not be intended as a stop-gap measure.