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Tony Tax
Tony Tax, Tax Consultant
Category: UK Tax
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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How will Capital gains affect my working and child tax credits I

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How will Capital gains affect my working and child tax credits?
I lent my brother and sister-in-law £15000 in 1992 to help them buy a house. It was in the form of a mortgage which was entered into the charges register of their house title deeds. The repayment amount was tied to 25% of the value of the house which £60000 in 1992.
Through inheritance, my brother and sister-in-law are now in a position to repay the Mortgage which we have agreed is equal to the value of £40000. As a base tax payer this will mean that I will be liable for about £2600 capital gains tax.
I have been working as a sole trader for the past 18 month starting up a building design business therefore I am on maximum Working and Child Tax Credits until my business starts making a liveable profit. How will a capital gain of £22400 affect my Tax Credits?

Pete M
Capital Gains don't affect your entitlement to tax credits.

However, it's possible that the Tax Credit Office will not see the £25,000 as a capital gain but as interest on the mortgage and that would count as income. That is, unless the entry in the title deeds shows that you bought a 25% interest in your brother's house and not that you simply lent them the money to help buy it.

The only way around the problem that I can see is that your brother effectively gives you back the original loan and a gift of £25,000 which would not be seen as income. As long as there is no paperwork that shows you were entitled to interest you may get away with it. You may have a problem if the TCO find out.
Customer: replied 7 years ago.
The Mortgage agreement which forms a charge against the property, states that "the repayment sum will be 25% of the balance remaining of the disposal value after deduction therefrom of the professional fees."
That's good news even though your brother does not appear to be selling his house. That suggests to me that you have an interest in the property.

The TCO may still argue that the extra money is interest as opposed to capital but at least you have something to fight them with if it comes to that.
Customer: replied 7 years ago.
The repayment is not dependant upon the sale of the property. Clause 4 of the Mortgage agreement states that the repayment date is the date 12 months from the date of the serving of a notice by the lender on hte borrower requesting repayment of the repayment sum.
Given that the amount you are to receive is dependent on the value of the property I would argue that you have effectively profited from the increase in the value of the house and that you have a capital gain.

However, it's an unusual situation and the TCO and the tax office may try to argue that the £25,000 is income especially if the mortgage agreement mentions interest. If that happens, appoint an accountant to take your case on.
Customer: replied 7 years ago.
There is no mention of interest in the mortgage agreement. the repayment is based entirely on an agreed 25% value of the property at the time of the repayment notice.

I'm off to bed now, so I will check the answer tomorrow morning.

It's good that there is no mention of interest so I would say that you have a capital gain and it should be reported as such in a tax return.
Tony Tax and other UK Tax Specialists are ready to help you
Customer: replied 6 years ago.
I have now been paid the agreed 25% value of the property (£40,000) and my accountant will be declaring a capital gain on that. I will let you know how that turns out.
The legal paperwork has still to be done for the charges register of their house title deeds. The tax office said that the date of the land register submission regarding the 25% payment would be the effective date of repayment regarding tax liability.
Let me know how you get on.