House sale - parents rent free - capital gains, or not?

A friend of mine bought his parents house in 1989 for £45,000 and they continued to live in it rent free until his Mum moved into sheltered accommodation a few weeks ago, (his dad died some time ago, but I dont know when). His mum has been suffering from Alzheimer's for the past few years.

The house is now empty and he is going to sell it for probably around £170,000.

Is his gain free of tax as the house was lived in by dependent relatives and no income was received.

If not, how are the various reliefs calculated, ( I think I can do the current taper relief, but am not sure what went before.

Many Thanks

Reply to
Richard Faulkner
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It seems such relief ended for houses bought after 6 april 1988.

Hopefully Ronald will be along soon :-)

tim

Reply to
tim (back at home)

Watch out for inhereitance tax as well. Because she used to own it and then continued to live in it, the house might still be in her estate. Mind you, at 170k it will be below the threshold for IHT unless she has other assets.

Robert

Reply to
Robert

No, that would only apply if she had gifted it. But she hasn't, she sold it. If it was deliberately sold at below market value, then the gift-with-reservation rules would of course come in, with resepect to the difference.

Wait a minute. It just strikes me that the GWR rules are trivial to get around. The problem with GWR is that the 7 year clock never starts on them, but it does start on outright gifts.

Now junior could get a 100% mortgage, buy the house off senior, then senior lives in it rent free until death, and gifts the cash outright to junior. This way, if senior dies within 7 years, the cash gift remains subject to IHT, but if senior dies later, it's tax free. Had just the house been gifted, though, it would remain taxable no matter how long senior survives.

Have I missed something?

Reply to
Ronald Raygun

Well, indexation allowance would apply, reducing the gain by between 36.9% and 46.5% (depending on which month of 1989 it was bought in) of the acquisition cost (£45k + incidental expenses).

Then apply taper relief, which for 8 full years since 06/04/98 is worth

35% (counting the bonus year), then deduct the personal CGT allowance for 2006/07. If Richard's friend has a wife, he could gift half the house to her prior to sale, thus doubling the personal allowance.

If, to simplify matters, the £45k figure is already inclusive of expenses, and the £170k is net of expenses, the gain is £125k. Let's say it was bought in June 1989, so IA is 40.9% of £45k, reducing the gain to £106k6. TR reduces this to £69k3.

On his own: Minus £8k8: £60k5 taxable. Say his income lies £10k below the higher rate threshold: His CGT bill will be £2k for those £10k plus £20k2 for the other £50k5. CGT payable: £22k2. Total in his pocket: £147k8.

With wife: Minus 2x£8k8: £51k7 taxable, split 50/50 with wife, £25k8 each. He pays 20% of £10k plus 40% of £15k8. Suppose wife has no other income, so all of her £25k8 is taxed at 20%. CGT payable: He £8k3, She £5k2, together £13k5. Total in joint pocket: £156.5k

Reply to
Ronald Raygun
5 From: Ronald Raygun - view profile Date: Mon, Apr 10 2006 1:35 pm Email: Ronald Raygun Groups: uk.finance Not yet ratedRating: show options

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Robert wrote:

"RR: No, that would only apply if she had gifted it. But she hasn't, she sold it. Have I missed something? "

But she has continued to live in it and has paid no rent. Does that really not affect things?

Robert

Reply to
Robert

I forgot to add that junior now uses the gifted money to pay off the mortgage. So in effect he has been gifted the money to buy the house, rather than the house itself. And money usually can't be GWR.

Reply to
Ronald Raygun

No. Why should it? The "living rent free in a house" only serves to "undo" the tax effect of gifting that house, by turning it into gift "with reservation". Such gifts do not qualify to be exempted from IHT under the 7-year rule.

Reply to
Ronald Raygun

Surely this would not be accepted by the capital taxes people would it? These are linked transactions that have the effect of gifting the house by senior to junior. Robert

Reply to
Robert

They can't be linked transactions, because a gift is not a transaction.

Or how about another approach:

Junior buys house from senior, using borrowed money, expecting that senior uses the money to pay market rent to junior (which will allow junior to pay the loan interest). Instead, senior decides to pay the whole lot back in a lump sum, considering part of it to be 7 years' rent in advance, and the rest of it to be a gift.

Reply to
Ronald Raygun

How about if junior claims that the "living rent free in a house" doesn't apply 'cos *he* "lived rent free" in senior's house for the first 20 years of his life?

What? You mean that you *didn't* pay 'market rent' when living with your parents? ;->

rgds, Alan

Reply to
Alan Frame

Ronald,

Thanks very much. He is married and is in the process of gifting half the house to the wife.

I'm not sure what they earn, but I'm sure they can work out the figures themselves with the info given.

Reply to
Richard Faulkner

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