Mother's house is already in our names; questions about CGT in the event of a sale

[JamesW11]

Hi all,

When my mother moved house in 2011, she put her house in the name of her four children (Land Reg and Deeds).
She did this so that on her passing, inheritance tax would not be applicable.
My youngest sibling, having taken advice, set it up so that she pays a peppercorn rent, and this arrangement is of course declared and taxed at the correct rate by each sibling to HMRC.

My question is about what happens in the event of a sale (either after her passing, or perhaps downsizing to a more manageable flat).
I have been told (and had it refuted by others) that if a property is sold, and it is not the primary residence of any of the owners, then Capital Gains Tax is applicable on the sale of the property. Does anyone know please if this is acccurate?

One of my siblings is a non UK tax resident, living in France - would they be exempt from UK CGT in the event of the sale, if in fact the others were required to pay CGT ?

Many thanks in advance!
James

[monabri]

https://www.gov.uk/capital-gains-tax/what-you-pay-it-on

"You pay Capital Gains Tax on the gain when you sell (or ‘dispose of’):

- property that’s not your main home "


"If you’re abroad

You have to pay tax on gains you make on property and land in the UK even if you’re non-resident for tax purposes. "


"My question is about what happens in the event of a sale (either after her passing, or perhaps downsizing to a more manageable flat).
I have been told (and had it refuted by others) that if a property is sold, and it is not the primary residence of any of the owners, then Capital Gains Tax is applicable on the sale of the property. Does anyone know please if this is acccurate?"

She is not the owner, she's paying rent. You and your siblings are the owners.

[swill453]

Does a peppercorn rent really allow you to avoid IHT? I thought it had to be at market rate.

Scott.

[DrFfybes]

Hi all,

When my mother moved house in 2011, she put her house in the name of her four children (Land Reg and Deeds).
She did this so that on her passing, inheritance tax would not be applicable.
My youngest sibling, having taken advice, set it up so that she pays a peppercorn rent, and this arrangement is of course declared and taxed at the correct rate by each sibling to HMRC.

James

Assuming it has all been done properly, basically you own (part of) a rental property and so it will be treated as such.

Yes, CGT will be payable. The acquisition value should be the price paid by your mother before she gifted it to you, and the RNRB IHT allowance will not apply.

Ironically your strategy which made sense at the time may well have ended up costing you when the rules changed, however it does remove an asset from the Estate for Care Home fees consideration.

Paul
edit for spelling.

[scrumpyjack]

A peppercorn rent will not be effective in escaping the 'gift with reservation trap'. It must be a market rent.

Many years ago my aunt did this with her two sons. A lovely house overlooking the Thames by Kew Bridge. Her sons called in an estate agent to advise on the appropriate rent but had had some difficulty getting the chap to understand that what was wanted was a fair rent, not an 'asking price' rent!

I fear you may have got the worst of both worlds with this. Losing private residence relief for CGT and still being liable to IHT

ps surely your acquisition value for the house will be its market value at the time she gave it to you?

[RockRabbit]

Hi all,

When my mother moved house in 2011, she put her house in the name of her four children (Land Reg and Deeds).
She did this so that on her passing, inheritance tax would not be applicable.
My youngest sibling, having taken advice, set it up so that she pays a peppercorn rent, and this arrangement is of course declared and taxed at the correct rate by each sibling to HMRC.

My question is about what happens in the event of a sale (either after her passing, or perhaps downsizing to a more manageable flat).
I have been told (and had it refuted by others) that if a property is sold, and it is not the primary residence of any of the owners, then Capital Gains Tax is applicable on the sale of the property. Does anyone know please if this is acccurate?

One of my siblings is a non UK tax resident, living in France - would they be exempt from UK CGT in the event of the sale, if in fact the others were required to pay CGT ?

Many thanks in advance!
James

I am no expert but I suspect this arrangement may not avoid IHT on your mother's death as it will be deemed a 'gift with reservation'. As your mother is living in the house and paying a 'peppercorn rent' the house may be deemed part of her estate and therefore liable to IHT on her death. I believe that the correct arrangement for avoiding IHT is full market rent and even then HMRC might challenge the arrangement. I would be interested to see the comments of any tax experts out there.

The CGT question will depend on the HMRC attitude to IHT arrangement. But either IHT or CGT will be due IMO.

[uspaul666]

Isn't there a rule that says even if the parent has sold their primary residence, the £175,000 IHT allowance on passing the property to the children can still be claimed? Designed to help children when the parents property needed to be sold for care home fees and the parent passed away soon after?

[Gerry557]

I have to agree with others that a peppercorn rent wont stop IHT and you will be subject to CGT. It has to be full rent. Currently mother has retained the benefit of the house. Its a "gift with reservation"

I would tot up the value of her estate roughly and come back for further advice.

https://www.gov.uk/inheritance-tax/gifts

[scrumpyjack]

There are some rules to avoid the GROB trap where a share of the property is given away, but the recipient of the share has to 'occupy' the property as well as the donor. It sounds like the children do not occupy the property if one lives in France?

[genou]

The CGT question will depend on the HMRC attitude to IHT arrangement. But either IHT or CGT will be due IMO.

You are too generous. It is definitely a GROB, so within the mother's estate for IHT purposes. That doesn't displace the actual transfer, so the children acquire the house at market value as at the date of the gift, and are liable to CGT when they dispose of it based on any increase from that value to the value at date of sale.

And just to top it all off, it is a residential property, so CGT is chargeable at the 18%/ 28% rates, and a real time return will be required on disposal.

My sympathies to the OP, but you have taken a 12-gauge to your own feet. You should take advice. My immediate reaction is to remove the reservation on the gift, by having your mother pay a commercial rent, which would start the 7 year clock running from that point. Clearly that will create immediate taxable rental income, and may require you to do stuff to the house - smoke alarms, CO detectors, whatever.

It also involves arithmetic - is the potential IHT liability outweighed by tax on rental income, for example. I can't think of a way to remedy the CGT position, short of gifting the house back to your mother, and taking the CGT hit on whatever uplift has accrued so far. It all depends on the numbers, hence the need for proper advice.


In the meantime, I think the mother is able to claim RNRB up to the max of 175k / value of house at date of gift, but I have never looked at whether GROB and RNRB interact, so am not sure on its availability. IF RNRB is due, there may be another amount to claim in respect of the father, depending on the circumstances.

[DrFfybes]

Hi all,
My youngest sibling, having taken advice, set it up so that she pays a peppercorn rent, a
James

Who gave the advice, were they regulated, and do you have a copy in writing?

If it is classed as a GROB then you may be able to claim against them.

[Lootman]

My immediate reaction is to remove the reservation on the gift, by having your mother pay a commercial rent, which would start the 7 year clock running from that point.

Could the mother not pay back rent for the period since the transfer? So that the 7-year clock start is also backdated?

Income tax would be due on the rent of course, but the mother's estate would drop by that amount as well for IHT purposes.

[genou]

My immediate reaction is to remove the reservation on the gift, by having your mother pay a commercial rent, which would start the 7 year clock running from that point.

Could the mother not pay back rent for the period since the transfer? So that the 7-year clock start is also backdated?

Income tax would be due on the rent of course, but the mother's estate would drop by that amount as well for IHT purposes.

For IHT you'd have to be "economic with the actualité" , since you can't amend the past. And then there would be the issue of missing income from the children's returns, so potentially 12 years of interest and penalties there. I don't think it would take HMRC long to grasp the situation.

Unfortunately the whole thing is a circular firing squad.

As the railwayman said when asked for directions, "I wouldn't start from here" .

For completeness, you either pay a full commercial rent or its a GROB - in principle 99% of a commercial rent ( should one be able to identify such a situation ) is still a GROB; so the peppercorn rent was always a waste of time.

[scrumpyjack]

Could the mother not pay back rent for the period since the transfer? So that the 7-year clock start is also backdated?

Income tax would be due on the rent of course, but the mother's estate would drop by that amount as well for IHT purposes.

For IHT you'd have to be "economic with the actualité" , since you can't amend the past. And then there would be the issue of missing income from the children's returns, so potentially 12 years of interest and penalties there. I don't think it would take HMRC long to grasp the situation.

Unfortunately the whole thing is a circular firing squad.

As the railwayman said when asked for directions, "I wouldn't start from here" .

For completeness, you either pay a full commercial rent or its a GROB - in principle 99% of a commercial rent ( should one be able to identify such a situation ) is still a GROB; so the peppercorn rent was always a waste of time.

Indeed the payment of a peppercorn rent might in itself trigger HMRC's computer system to raise a red flag!
As for market rent, you really need to get a professional written advice on what that rent should be, as my cousins did, to obviate any attempt at 'grobbing' by the inspector. Ha - a new word 'grobbing'!

[swill453]

Indeed the payment of a peppercorn rent might in itself trigger HMRC's computer system to raise a red flag!

And more so, since each sibling is declaring a quarter of the rent to HMRC.

Maybe, since the arrangement was set up by another sibling, the rent wasn't originally peppercorn but was more akin to a market rate. And the OP just has the wrong impression. Maybe because the rent hasn't gone up in the interim and now looks low.

Just speculating...

Scott.

[Charlottesquare]

Could the mother not pay back rent for the period since the transfer? So that the 7-year clock start is also backdated?

Income tax would be due on the rent of course, but the mother's estate would drop by that amount as well for IHT purposes.

For IHT you'd have to be "economic with the actualité" , since you can't amend the past. And then there would be the issue of missing income from the children's returns, so potentially 12 years of interest and penalties there. I don't think it would take HMRC long to grasp the situation.

Unfortunately the whole thing is a circular firing squad.

As the railwayman said when asked for directions, "I wouldn't start from here" .

For completeness, you either pay a full commercial rent or its a GROB - in principle 99% of a commercial rent ( should one be able to identify such a situation ) is still a GROB; so the peppercorn rent was always a waste of time.

Still, these scenarios are always good news for lawyers and accountants- my late father (a solicitor) had a favourite toast, " God bless the man who writes his own will", DIY planning is a prime example of unknown unknowns biting back.

In my employment it is DIY developers who build properties without planning what they intend to do with the property once built, tons of fun with extra vat, LBTT etc, it is why all the lawyers and accountants can send their kids to private schools.

[orangepekoe]

I think you've been lucky that none of the 4 siblings have needed to sell their 1/4 of the house as part of a divorce settlement.

[monabri]

I think you've been lucky that none of the 4 siblings have needed to sell their 1/4 of the house as part of a divorce settlement.

That would really cause problems!

[swill453]

I think you've been lucky that none of the 4 siblings have needed to sell their 1/4 of the house as part of a divorce settlement.

Or bankruptcy.

Scott.

[scrumpyjack]

A house in W11 (note the OP's pen name), will be of very high value

(I bought one with my brother in 1971 and sold in 1980. Makes me sick to see what it is worth now on Rightmove )