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My mother’s estate. Inheritance tax has to be paid. Assets include a house which for probate purposes is valued at £220k. Assume that HMRC accept that value. It has been let on a three year lease. Assume it can be sold for 300k at the end of the lease. It seems to me that there is a chargeable gain to the estate of £80k, and that after using up the estate’s CGT allowance (£11,600?) the balance would be subject to CGT at the estate rate. My brother and I are the sole residuary beneficiaries. If I transfer the property to us both jointly as tenants in common for £231,600, are we then entitled to use both our CGT allowances when we come to sell the property? What rate will the rent be taxed at if the property remains in the estate? Will there be any further charge when the rent is paid to brother and me? Presumably if it is just transferred we pay tax on the rent at our respecttive personal rates. is that correct? Is stamp duty payable on the possible transfer to brother and me? Am I barking up the wrong tree completely? Is it fair to ask anyone questions like this on a service I pay £11 for :-)
Thought I was entitled to the answer as part of the monthly service. But as I had already recognised that it was not right to expect it for £11, I have authorised the £36
Hello, if you have any questions or need further clarification after reading my answer please let me know.
please clarify for me ...
you say IHT has to be paid on your mother's estate.. is it in excess of the threshold of £325k for IHT purposes?
was the property your mother's main residence and only property for CGT purposes?
secondly, I am not clear when you say property remaining in the estate .. is it not your intention to pass the property to the beneficiaries now or once probate (if any) is settled?
thank you
yes of course it is over 325k otherwise there would be no IHT liability.
It was her residence (and only property), so there is no lifetime CGT charge.
I meant if it remains I will not pass on the freeehold unless there are tax advanatges to do so, during the term of the tenancy,
Richard
Thank you for your response
My response to questions raised is as follows:
Chargeable gains are taxed at 28% on estate capital gains. Annual exempt amount is £10,600.
More information on this is covered here
http://www.hmrc.gov.uk/rates/cgt.htm
You will both be entitled to your CGT allowance of £10,600 each (current tax year) when you eventually sell the property for a gain.
Rental income will be taxed at 20%. if the property remains in the estate. Estates are not charged to higher rate Income Tax, as this applies to individuals.
If the property was transferred to you and your brother, then you would each pay tax on rental income at your personal tax rates. Any distribution of income (after tax) whilst the assets remain in the estate would not carry additional income tax.
If the property is acquired under the terms of a will, there's no need to notify HMRC and no SDLT is payable.
If you need more information please let me know.
I hope this is helpful and answers your question. I am available for any follow up questions you may have, and you can use the reply button to post your follow up questions to the page.
thanks for your answer. What remains unclear to me is whether the estate has three annual allowances or one or two. She died on 29 February 2012 and I obtained probate in June. Does that mean we get the 2011/12 and the 2012/13 allowance. So long as the estate is not fully administered, and it won't be if we retain the property, do we also get the 2013/14 allowance.
Am I entitled to put a notional value on it of the IHT valuation plus the appropriate CGT allowance when transferring it to brother and me? At some point I will have to do a tax return for the estate won't it? If so do I specify the value then. Won't the Revenue be more likely to accept the higher value if we wait a while? In any event it makes sense not to transfer it for the moment if we are only paying 20% rent, rather than the 40% I, and I think he, would pay if the rent were paid directly to us?
The estate will be able to claim one annual exempt amount during the administration period. You're entitled to the Annual Exempt Amount for the tax year in which the death occurred and the following two tax years. After that there's no tax-free allowance against gains during the administration period.
More information on it is covered here
You should put the market value used for IHT purposes (not notional value) when transferring the property to your brother and yourself.
Yes you would have to file a tax return and deal with other tax matters. If you defer transfer of property to a later date and there is increase in value then the higher value would prevail. You will find guide to understanding tax when someone dies helpful see link here.
http://www.hmrc.gov.uk/trusts/tax-when-someone-dies.htm#4
Also information on what to do about tax and benefits after death is covered here
http://www.hmrc.gov.uk/bereavement/index.htm
Sorry to be a pain, but neither you nor the leaflet you refer me to answer the question of how many annual allowances we get. Are we restricted to one because we obtained probate within a year? Do we get two because she died in one tax year and we received probate in the next? Do we get all three if the estate is not be wound up when we go into the third tax year?
Also you say "You should put the market value used for IHT purposes (not notional value) when transferring the property to your brother and yourself", but Why? So long as I can show that the value of the property has appreciated due to market fluctations or improvements am I not entitled to rely on that? That appears to be what you suggest in the next sentence of your answer.
I have to a balancing exercise between the income tax advantages of retaining the property in the estate/trust against the CGT implications and I cannot do that without knowing how much allowance the estate has.
Thanks,
Thank you for your response.
There is only one (single) annual exempt amount available each year.. and you get three years including the year of death to avail it. If you were to dispose of estate assets in each of the three years then there is a allowance for each year but you can't aggregate the allowance for three years against sale of one asset (the property) in year 3
For probate purposes, the property will be valued at market value at the time of death. That is value if transfer takes place once probate is established and settled. If the property grows up in value when you eventually transfer it in say 3 years time then the value for transfer/cgt purposes will be the value prevailing at the time of transfer.
with deference to the fact that this may be too sophisticated tax avoidance to expect an answer to for £36, is there any theoretical objeciton to stop me transferring a one third interest to say my brother in year one, to me in year to and to us jointly in year three?
I am not sure if you would be able to do this ... You are referring to transfer of interest in property and every change would have to be registered at the land Registry. My advice would be to consult a property lawyer on this aspect please.
Hi Richard
Just checking to see if my answer was helpful. If you have any follow-up questions for me, please let me know.
Experience: FCCA - over 35 years experience as a qualified accountant