Capital Gains Tax Questions on a jointly owned property disposal

Question:

My Mother purchased her Council owned property under the Right to Buy Scheme in July 1994. I helped her to buy the property and although the legal title was solely in her name a deed of trust was lster drawn up by the solicitor.

This states that I held 30% of the property and she held 70% of the property.

The market value of the property at the time of purchase was £40,000 but she got a 30% discount and the purchase price was £28,000.

Both of us are retired and our only income is our state pension. I live elsewhere.

My mother is now ill.

The property is worth in the region of £200,000.

If she dies:

1.Does she have to pay CGT. 2.If yes what reliefs are available and how is the CGT calculated. 3.Is there anything that can be done to reduce this liability. 4.Is the gain calculated on the purchase price of the property or the market value of the property at the time.

Answer:

CGT would only be payable on a disposal of the property by you. The share of the property to be bequethed to you will pass to you at its probate value (ie market value on death).

The death of your mother would not create a CGT charge. Instead Inheritance tax would be levied, although you would need to assess whether her estate was below the IHT nil rate band.

On a disposal, the gain arising will depend on a number of factors.

Firstly, the allowable cost will essentially depend on the structure of the transaction. If however, the facts were that the property was conveyed to the mother who then gifted the 30% share under the deed of trust, then it is likely that a gain would have arisen at this time on the difference between the market value of the 70% interest, and the actual cost. (market value would be used, as the parties are connected). This gain would in any case have been likely to be exempt due to Principal Private Residence ('PPR') relief assuming the property had been Mrs H's sole residence throughout her period of ownership.

The base cost of the interest to you, is therefore likely to be the market value of the interest at the date of the original transfer.

On a disposal, you would have the annual exemption to offset against any gain. For the current year this is £9,600.

It may be beneficial for you to transfer an interest in the property to your spouse. This would be of benefit your spouse also had the annual exemption to offset, and assuming he was a basic rate taxpayer. Any transfers between spouses are essentially tax free for CGT purposes, although it is important to ensure that any transfer is not made immediately prior to a the third party disposal as the Revenue could then challenge the effectiveness of the interspouse transfer.

There are few other reliefs that can be claimed. PPR relief will not apply to you, as you have not resided in the property. There used to be a relief that would have applied here, but the occupation & purchase needed to take place prior to April 1988.

It may be more tax efficient, if the deed of trust were not in existence, and the mother simply left the 70% interest to you in her will (subject to the estate being covered by the nil rate band.

About the Author

He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.

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