CGT on sale of has owned houses

[Bubblesofearth]

Asking this on behalf of a friend who is not on TLF.

Friends father bought 2 houses for his 2 sons to live in and arranged that each son owned half of each house. Looks a terrible decision CGT-wise now but the houses were bought back in the 80's before CGT relief on PPR had been introduced.

If the sons sell then assumption is they will each face CGT on the half of the house they own but that is occupied by the other son. Is this correct or is there any way to get around it. Obviously if the father had bought the sons a house each such that they were sole owners of each house then no CGT would be payable. But sadly that wasn't the case.

BoE

[monabri]

Did each son live in their respective houses ( ie they didn't reside in house 1 and let house 2?). That would have further CGT implications!

[genou]

PPR started with CGT in 1965, so it was an odd decision when made.

They'll each have CGT liability on their half of the other brother's residence.

[Lootman]

They'll each have CGT liability on their half of the other brother's residence.

Could the sons not sell the halves of the houses that they own but do not live in to the other, say for an amount equal to half the original cost basis so that there is no profit?

I am guessing not.

[mc2fool]

If the sons sell then assumption is they will each face CGT on the half of the house they own but that is occupied by the other son. Is this correct or is there any way to get around it.

Dying?

Short of that, I don't know of a way of getting round it but assuming they live in the two houses, one in each, and they aren't in a hurry, they could incrementally reduce their CGT liability by each brother selling their half of the house they live in to the other (no GCT on that as it was their PPR), and then swapping, each moving into the house that they now fully own.

When each finally sells there will be no CGT on the half they bought from the other brother and the CGT liability on the other half they always owned will be reduced pro rata by the period they lived in it over the period of ownership, so the longer they stay put the lower their proportion liable to CGT.

[scrumpyjack]

Presumably their half share in the other house is not worth much as it has a sitting tenant

[Lootman]

Presumably their half share in the other house is not worth much as it has a sitting tenant

I believe that issue comes up when valuing the marital home for divorce purposes. And that the rule of thumb is to reduce the valuation by 10%.

Of course in practice nobody would buy half a house with a stranger already in there.

And I once bought a building with a sitting tenant in there, with a pre-Thatcher lease so I could not kick him out. Nobody would give me a mortgage on it so I had to pay cash.

[gryffron]

AIUI the deeds don’t actually list the percentage owned by each individual. Only that they are TiC.

So…
Could they sell a few thousand pounds worth of house to each other each year, in order to use up their (ever diminishing) CGT allowance each year. Since no changes to deeds, no legal fees involved. As long as the transfer is well documented each year, they would eventually be 100% owners.

Obviously this isn’t a quick fix, but at the very least would reduce CGT going forward from now.

Gryff

[genou]

Presumably their half share in the other house is not worth much as it has a sitting tenant

That is at least a small mitigation. They could swap the half-in-the-other-house with each other, and it would be reasonable to lower the value because of the split ownership. But I suspect the fly in the ointment is that ( assuming there is no great disparity in the underlying value of the two houses* ) it would place very little cash in the brothers' hands to pay even the reduced resultant CGT. If there is a large disparity, one brother is going to have additionally to find the cash to buy the other out.


* I imagine this was the original reason for the dual ownership.

[Lootman]

AIUI the deeds don’t actually list the percentage owned by each individual. Only that they are TiC.

So…
Could they sell a few thousand pounds worth of house to each other each year, in order to use up their (ever diminishing) CGT allowance each year. Since no changes to deeds, no legal fees involved. As long as the transfer is well documented each year, they would eventually be 100% owners.

Obviously this isn’t a quick fix, but at the very least would reduce CGT going forward from now.

Gryff

The OP did not say if the ownership is TIC or joint tenancy.

If the latter then ownership has to be 50/50. If TIC then I thought that the deeds or LR entry did specify the ownership percentages, although that can also be recorded in a side agreement like a declaration of trust.

A few of us have now come up with the idea of cross-selling these shares, in part or in whole, which makes me think it could help.

[Dod101]

AIUI the deeds don’t actually list the percentage owned by each individual. Only that they are TiC.

So…
Could they sell a few thousand pounds worth of house to each other each year, in order to use up their (ever diminishing) CGT allowance each year. Since no changes to deeds, no legal fees involved. As long as the transfer is well documented each year, they would eventually be 100% owners.

Obviously this isn’t a quick fix, but at the very least would reduce CGT going forward from now.

Gryff

The OP did not say if the ownership is TIC or joint tenancy.

If the latter then ownership has to be 50/50. If TIC then I thought that the deeds or LR entry did specify the ownership percentages, although that can also be recorded in a side agreement like a declaration of trust.

A few of us have now come up with the idea of cross-selling these shares, in part or in whole, which makes me think it could help.

Yes he did. TIC.

Dod

[mc2fool]

They could swap the half-in-the-other-house with each other, and it would be reasonable to lower the value because of the split ownership.

I'm pretty sure that would be counted as a disposal and as the half in the other house wouldn't be their PPR it would attract immediate CGT. If they're going to swap halves it has to be their PPR halves to not have immediate CGT, and then swap where they live so that their fully owned houses become their PPRs.

... assuming there is no great disparity in the underlying value of the two houses* ... * I imagine this was the original reason for the dual ownership.

Yes, that would make sense.

[genou]

They could swap the half-in-the-other-house with each other, and it would be reasonable to lower the value because of the split ownership.

I'm pretty sure that would be counted as a disposal and as the half in the other house wouldn't be their PPR it would attract immediate CGT. If they're going to swap halves it has to be their PPR halves to not have immediate CGT, and then swap where they live so that their fully owned houses become their PPRs.

I like your reasoning. They could probably go the whole hog and swap the houses ( as 100% PPR at that stage ) after the exchange of PPR-elements to stay exactly where they are. They'd get charged on each of the swaps for SDLT, so there is still a need to find cash, but that should turn out less than CGT at 18/28% .

[mc2fool]

I'm pretty sure that would be counted as a disposal and as the half in the other house wouldn't be their PPR it would attract immediate CGT. If they're going to swap halves it has to be their PPR halves to not have immediate CGT, and then swap where they live so that their fully owned houses become their PPRs.

I like your reasoning. They could probably go the whole hog and swap the houses ( as 100% PPR at that stage ) after the exchange of PPR-elements to stay exactly where they are. They'd get charged on each of the swaps for SDLT, so there is still a need to find cash, but that should turn out less than CGT at 18/28% .

Dunno if you missed my initial post in this thread or I just wasn't clear it in (probably the latter), but no, they're not 100% PPR for CGT at that stage. The swapped half will be fully PPR but the other half, the half that the now occupier owned before they moved into it, will only be PPR going forward but not retrospectively.

So if they sell up (inc. swap again) immediately then the full CGT will be liable on that half. However, for each year they live in it the proportion of that half liable to CGT reduces pro rata by the time it was PPR vs total ownership period. So if, e.g., they inherited the houses 12 years ago and do the swap as described and live in them for another 7 years and then sell, then the CGT on that half will be on only 12/19ths of the gain; 19 years ownership, 12 years not PPR.

[Lootman]

I'm pretty sure that would be counted as a disposal and as the half in the other house wouldn't be their PPR it would attract immediate CGT. If they're going to swap halves it has to be their PPR halves to not have immediate CGT, and then swap where they live so that their fully owned houses become their PPRs.

I like your reasoning. They could probably go the whole hog and swap the houses ( as 100% PPR at that stage ) after the exchange of PPR-elements to stay exactly where they are. They'd get charged on each of the swaps for SDLT, so there is still a need to find cash, but that should turn out less than CGT at 18/28% .

But again doesn't that CGT liability assume that the half-shares are sold at market value? And so there is a gain to tax?

If instead the sales are priced at the original cost basis then there is no gain to tax.

The OP did not say if the ownership is TIC or joint tenancy.

Yes he did. TIC.

OK, sorry I completely missed that.

[RockRabbit]

I like your reasoning. They could probably go the whole hog and swap the houses ( as 100% PPR at that stage ) after the exchange of PPR-elements to stay exactly where they are. They'd get charged on each of the swaps for SDLT, so there is still a need to find cash, but that should turn out less than CGT at 18/28% .

But again doesn't that CGT liability assume that the half-shares are sold at market value? And so there is a gain to tax?

If instead the sales are priced at the original cost basis then there is no gain to tax.

They have to be valued at market value for CGT purposes as the sale will be to a 'connected person'.

[genou]

Dunno if you missed my initial post in this thread or I just wasn't clear it in (probably the latter), but no, they're not 100% PPR for CGT at that stage. The swapped half will be fully PPR but the other half, the half that the now occupier owned before they moved into it, will only be PPR going forward but not retrospectively.

So if they sell up (inc. swap again) immediately then the full CGT will be liable on that half. However, for each year they live in it the proportion of that half liable to CGT reduces pro rata by the time it was PPR vs total ownership period. So if, e.g., they inherited the houses 12 years ago and do the swap as described and live in them for another 7 years and then sell, then the CGT on that half will be on only 12/19ths of the gain; 19 years ownership, 12 years not PPR.

I get you, I hadn't seen the effluxion of time bit of the proposal. But your proposal does require them to actually swap living spaces. They would still have to pay SDLT on the first swap. Prima facie on the swapped value, but there's obviously a marriage value ( think merging the freehold / leasehold ) and I don't know how that would work. I suspect the upheaval of moving may require the tax saved to be enough to make the game worth the candle.

It's an interesting parlour game. It must be an absolute bugger for the real people involved.

[Spet0789]

Have read this thread quickly so may be making a mistake somewhere but isn’t the answer obvious? CGT-wise at least, if not for SDLT. I assume each house is worth the same.

Each brother sells the half of the house he lives in to the other. That sale benefits from PPR and attracts no tax. Then each brother ends up owning the other brother’s house. Then they immediately sell to each other. That will incur SDLT but no CGT.

That may be what has already been suggested, but I think I have stated it more simply.

[mc2fool]

Dunno if you missed my initial post in this thread or I just wasn't clear it in (probably the latter), but no, they're not 100% PPR for CGT at that stage. The swapped half will be fully PPR but the other half, the half that the now occupier owned before they moved into it, will only be PPR going forward but not retrospectively.

So if they sell up (inc. swap again) immediately then the full CGT will be liable on that half. However, for each year they live in it the proportion of that half liable to CGT reduces pro rata by the time it was PPR vs total ownership period. So if, e.g., they inherited the houses 12 years ago and do the swap as described and live in them for another 7 years and then sell, then the CGT on that half will be on only 12/19ths of the gain; 19 years ownership, 12 years not PPR.

I get you, I hadn't seen the effluxion of time bit of the proposal. But your proposal does require them to actually swap living spaces. They would still have to pay SDLT on the first swap. Prima facie on the swapped value, but there's obviously a marriage value ( think merging the freehold / leasehold ) and I don't know how that would work. I suspect the upheaval of moving may require the tax saved to be enough to make the game worth the candle.

It's an interesting parlour game. It must be an absolute bugger for the real people involved.

Yes, they'd have to swap living spaces, but it's the only mechanism I can see offhand to reduce their potential CGT liability, and then of course only notably so if they continue to live in the properties for a decent amount of time thereafter. And, yes, they'd have to pay stamp duty, which could be anything from nothing to lots, and other costs, so it is a numbers game.

Marriage value only applies to leaseholds with less than 80 years to run, and I believe is being abolished by the Leasehold Reform Act, although I expect there'll be some ifs, buts and conditions around that.

[mc2fool]

Have read this thread quickly so may be making a mistake somewhere but isn’t the answer obvious? CGT-wise at least, if not for SDLT. I assume each house is worth the same.

Each brother sells the half of the house he lives in to the other. That sale benefits from PPR and attracts no tax. Then each brother ends up owning the other brother’s house. Then they immediately sell to each other. That will incur SDLT but no CGT.

That may be what has already been suggested, but I think I have stated it more simply.

Yes you're making a mistake. See viewtopic.php?p=644037#p644037.