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 October 2005. 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.

We are both on the brink of retirement, the kids are grown up and are, to some extent, financially independent and the family house is just too big for the two of us. Any advice?

Ah, early empty-nesters - what a fortunate position to be in. But before you sell the family home in Hampstead and blow the proceeds on a Maserati and a round-the-world cruise, take stock of your finances and think about the future.

First things first: selling the house?

You won't have to pay Capital Gains Tax (CGT) on the gain you made on the property if it was always your main residence but you should start thinking about minimising future Inheritance Tax (IHT). Yes, spending it all on cars and holidays is one way of doing that but the kids may not approve. While you're still healthy, you could make some gifts to them, provided they can be trusted to use the money wisely.

Or, if they have children of their own, you could think about skipping a generation and establishing a trust for your grandchildren. Any gifts will fall out of your estates after seven years.

What about day-to-day living?

Have a long, hard look at your pension fund before you give anything away. Are you on course for a good pension? Or is it not going to provide the kind of retirement you'd hoped for? If your fund could do with a helping hand, think about paying a lump sum contribution. This will get easier from next April when the rules change and the amount you will be allowed to pay into a personal pension will increase dramatically. And don't forget that higher rate taxpayers will get 40 per cent tax relief on pension contributions. You could even think about "immediate vesting" - taking an annuity at once as well as the 25 per cent tax-free lump sum.

Anything else before we open out the sun loungers in the conservatory and mix those Martinis?

While you're at it, don't forget to top up your ISAs for the current year, too. You can each put up to £7,000 pa in these virtually tax-free investments.

And just before you head off on that cruise, make sure that your wills are up to date and tax efficient. Bon voyage!

We have been residents in the Channel Islands for the past 20 years and are non-resident in the United Kingdom for tax purposes. We also own a property in the UK.

Could you tell us: will there be a Capital Gains Tax (CGT) payable in the UK when we sell the property? Will there be Inheritance Tax (IHT) payable in the UK if the property is passed on to our children who live in the UK?

Maggie Fleming writes:

The CGT issue is straightforward. For a person to be liable to CGT on the sale of an asset, he or she must be either resident or ordinarily resident in the UK. As you are not resident in the UK and have not been for some years, it is extremely unlikely that you would be considered ordinarily resident here. "Ordinary residence", as the phrase suggests, means the place where you are habitually resident.

Residence status does not affect IHT. Domicile is the determining factor. This is very hard to define but, broadly, you are domiciled in the country with which you have your closest links. You can have only one domicile at a time, whereas you could be tax resident in more than one country.

It is very difficult to lose your domicile of origin, which is acquired at birth, normally from your father. So, if your father was domiciled in any of the constituent countries of the UK, you are likely to be a UK domiciliary also.

A UK domiciliary will pay IHT on their entire estate on death, while a non-UK domiciliary will pay IHT only on their UK estate. As the property is situated in the UK, therefore, it is potentially subject to IHT whether you are domiciled in the UK or not. Provided you survive the gift for seven years, however, it will drop out of your estates - there is a tapering relief on death after three years.

We read recently of the two gay men who intend to register their relationship and so would be treated as a married couple as regards Capital Gains Tax (CGT) and Inheritance Tax (IHT).

I am widowed and share a house with my sister. A few years ago we made wills and put the house in joint names, whether tenants-in-common or joint-tenants I cannot recall. This was done in an attempt to protect my daughter from taxes when she eventually inherits.

We are not "a couple" in any legal sense since there is no sexual relationship. However, we are mutually dependent, financially and otherwise, and wonder whether our joint ownership is, after all, an advantage. There must be thousands of people in our situation.

Maggie Fleming writes:

The new Civil Partnership Act is a long-overdue reform designed to grant legal recognition to same-sex couples who cannot marry. While it is not just (or even primarily) about tax, it will give registered gay and lesbian couples the same advantages as are currently enjoyed by married couples.

There is no similar legislation covering your situation. On death, each of you will be entitled to your own nil-rate band (currently £275,000) but everything over that will be taxed at 40 per cent.

I do not know how large your and your sister's estates are but I am assuming that the house forms the bulk of your wealth and that it is worth more than £275,000. If a half share of the property plus your other assets is less than £275,000, there will be no IHT payable when you die - the same applies to your sister. So, by owning it jointly, you can each make good use of your own nil-rate band.

You should check that the house is held as tenants-in-common. That way you can each leave your share to whoever you wish - presumably your daughter will inherit both your and your sister's shares. If you own the house as joint-tenants, you cannot will it away from each other and this will cause problems on the second death, as the value of the entire house will be comprised in that person's estate.

You should also be aware that the gift of a half share a few years ago is a potentially exempt transfer and could fall back into your estate if you die within seven years of the gift, although tapering relief is available provided you live for at least three years after the gift.

You often recommend that husbands and wives swap or share assets to make best use of their annual capital-gains exemptions. I own a second home which is in my name, is not mortgaged and will generate a big capital-gains liability when sold. If I transfer half ownership to my wife beforehand, can this be done with a declaration to the Revenue, a simple gift deed, or must it be formally transferred with a conveyance and Land Registry submission? And are such "no strings" gifts exempt from stamp duty?

Maggie Fleming writes:

Whether a particular method of transferring an interest in land is effective is a legal matter and you should consult a solicitor. From purely a tax point of view, however, the transfer should be as watertight as possible and I would recommend a formal conveyance.

While the Revenue have always regarded "no strings" gifts to a spouse as a legitimate way of reducing CGT, policy can change and it is better to be safe than sorry. If your wife's interest is noted in the Land Registry entry, this should put the matter beyond doubt. Your wife will, of course, be entitled to half of the proceeds.

In the unlikely event that you have owned it for less than two years, however, and if you have lived in it, you could nominate it as your main residence for a short period and enjoy exemption on sale. This does not sound likely from the facts you have given.

Stamp Duty Land Tax will not apply, as it is a gift and the property is unmortgaged. If there were a mortgage, it would apply if your wife took over part of the loan.