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My brother and I are looking to sell our property and have a question about inheritance tax and capital gains tax. The property, which is going to be sold for £440,000, was transferred to my brother and myself by my mother in 2002. However, she has continued to live there alone since then. I do not own any other properties other than being the co-owner of this one. My brother is now in the same situation, having recently sold his flat (this year). After the mortgage was redeemed, the proceeds amounted to £37,000. He currently lives with his girlfriend at her property.What would our tax liability (if any) be in terms of both capital gains tax and inheritance tax once we sell the property? And would there be any advantage in the property being transferred back to my mother for the sale (she has no other assets)?Jeremy xxxx
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Has your mother paid rent to either of you please since her gift?
Has she been granted any form of life interest to remain in the property?
May I ask if your father still alive?
She has not paid any rent to us. She has not been granted any life interest to remain in the property. (She will be coming to live with my brother once the property has been sold.) Our father died around twelve years ago.
Thanks. Are you able to provide a ballpark estimate as to the value of your mothers estate other than the property?
She has no other assets. Almost no value to her estate
Thanks. Would you and your brother be willing to grant your mother a life interest in the property at this stage? She can always gift you the money from the sale once sold. Is this something you might be prepared to consider?
What is a life interest in the property? I don't understand the term.
A life interest is a right granted by you and your brother that she may live in the property as long as she wishes. This may have been an implied understanding already. A life interest makes this a legal right...
Yes, that has been an implied understanding already. Yes, we would be prepared to make it a legal right if necessary/advantageous.
Thanks. Finally did your dad to your knowledge leave everything or almost everything to your mum on his passing?
Thanks. Based on what you have told me the position is that your mother will benefit from your dad's unused nil rate band which is presently valued at £325K and accordingly she will have a £650,000 allowance before inheritance tax is charged. Accordingly based on the figures you have given me inheritance tax is not a issue and can be disregarded as a problem.
Accordingly your remaining issue is CGT. If you were to affirm a life interest was given to your mother by you and your brother upon her gifting the property to you which is contingent upon your mother continuing to live in the property. If your mother moves out the contingency would provide that the life interest comes to an end and that you and your brother are then entitled to the money. Accordingly CGT would be avoided because the gain would be attributed to your mother under her life interest and she can exercise relief for her principal private residence - as you will no doubt be aware CGT is charged on a persons principal place of residence.
An alternative to a life interest trust is confirming that you held the property on a bare trust for your mother. This would rely on your mother gifting you the money from the sale when the property was sold which should would be under no obligation to do but it would similarly allow you to avoid CGT.
A solicitor will be able to draw up the appropriate trust document for you for a cost of somewhere between £250-500 + VAT I would estimate once you have decided which approach you prefer to take in conference with your brother.
Is there anything above I can clarify for you?
Thank you. I had thought that the £325,000 allowance was relevant to my brother and myself, but you are saying it is relevant to my mother and father, not to us. In summary, am I right in thinking that we need take no action and can sell the property in our names without any tax being payable (including capital gains as well as inheritance tax)?
Sorry - I replied before seeing you additional replies. Let me read through the additional replies once more.
To be clear on the point everybody has £325K as a basic allowance against inheritance tax. However if you are married and your spouse predeceases you, anything left to the surviving spouse does not eat into your allowance. So here because your father passed away leaving everything to your mother he did not "use" any of his nil rate band and as a result of a change in the law several years ago your mother can now utilise his unused band and accordingly she effectively has double the allowance to £650 before tax is paid on her estate. You therefore have no inheritance tax worries in respect of your mothers estate based on the above figures.
Capital gains tax on the other hand could be an issue for you unless you evidence that a trust exists in your mothers favour to ensure you can use your mothers exemption for CGT.
Is there anything above I can clarify for you any further?
So if my mother moves to live with my brother before the sale is completed, does this matter? Also,
Providing an appropriate trust deed is put in place to evidence the trust arrangement this should be of no consequence. If you don't put in place a trust deed to evidence a trust you may find you are fighting a battle with the Revenue to prove that a trust existed as the Revenue will be keen to treat the property as being owned by you and your brother without a trust so they can levy CGT. An appointment with a private client solicitor to execute a deed of trust would be worth considering to avoid entanglements with the Revenue on CGT.
if my brother and I were to sell without setting up a trust - i.e. as things are now - what would our capital gains tax liability be?
Potentially it could be the difference between the value of the property in 2002 and what it is now less 2 x £10,900. The tax will be charged at 18% or 28% depending on whether you and your brother are respectively higher rate tax payers or not. So if the property has made a substantial gain since 2002 the exposure could potentially be significant.
Does the above answer all your questions or is there anything I can clarify or help with any further?
Can I ask you further questions if necessary at a later stage? I have no more questions at present.
Certainly. If you have no further questions for now I should be very grateful if you would kindly take a moment to rate my service to you today. Your feedback is important to me. This will also save the thread to your account and you are welcome to return to ask follow up questions if you need to.
Great - will do that now. Thanks very much for your advice.
On the basis of your advice we recently contacted a solicitor with a view to setting up a life interest trust in my mother's name. The advice we received was that the life interest trust would not stop the liability to pay CGT. We were even told there was no way to avoid CGT in our case.
We would be grateful if you could do further research and consult your colleagues on this issue in order to confirm whether you have given us the correct advice; obviously we do not want to pay out for something which will be of no use to us.
Hi JoshuaSeveral days ago now I asked a follow-up question which I see was supposed to be relisted. I have heard nothing for several days. The issue is that when upon your advice we consulted a solicitor he said that a life interest trust would not offer protection against CGT and that nothing else would either. My brother then consulted another solicitor who was unsure whether a life interest trust would provide protection.Are you sure that a life interest trust will indeed provide protection?