Capital Gains on transfer

[Bejay]

I would appreciate guidance about Capital Gains Tax and particularly any discounts and allowances applicable, if any.

In June 1988 I purchased my Mothers council house with 14K mortgage in my Mothers name. My Mother continued to live in the house.

In October 1989 I moved back home to live with my Mother permanently. I had earlier purchased a flat as my main residence but unable to sell had to sublet in June 1991 for an extended period.

In August 1997 I transferred Mother’s house to joint ownership (myself and Mother), and raised the mortgage to pay for house improvements (DG, GCH, insulation). The house was valued at 45K.

Appreciate any advice.

[Incredulum]

Not sure what you want advice on, as there's nothing in particular you seem to want to know. Try answering these questions:

1. What did the house cost when you purchased it.

2. "I purchased the house in my mother's name". Whose was the house - yours or hers?

3. What happened after 1997?

4. Do you intend to sell?

[Bejay]

1 and 2. The house was bought under right to buy from the council after discount of 53% for £14K, it was bought originally by my brother and myself to share the mortgage of £14K, under the rules only my Mothers name could be on the mortgage deed.

3 and 4. In 1997 I raised the mortgage to 28K and transferred ownership from Mother to joint ownership (mother and myself), the money was raised to pay off my brother and for house improvements (£8K).

In October 2000 the mortgage was raised again to £48K and transfer to sole ownership of the house, I paid £18K to my Mother for her 50% share of equity and declaration of trust for my Mother. House was valued at £68K.

My Mother died recently this year.

The house is currently valued £135K. I do not intend to sell the house. During these early transactions I had no idea what CGT was, its only during probate that the solicitor mentioned possible CGT.

[Incredulum]

You have had sole ownership of the house since 2000, since when it has been yours to sell as and when you wish - not your mother's to live in until she dies?

The house is therefore not in your mother's estate. It has belonged to you since at least 2000. There is no tax to pay unless you sell it - at which point you would be likely to have a CGT liability.

How much tax is a tricky question, as it's far from clear to me who owned the property beneficially at the various stages.

[Bejay]

I agree it’s tricky, that’s what the solicitor said, odd though since the probate solicitor is the same solicitor who processed all the house transactions, odd still and convenient he said he destroys all his paperwork after 10 years. Is this normal?

Obviously there has been no tax planning during these house transactions, they have been driven by events and I had no concept of CGT.

However after some research on the internet I would greatly appreciate a response the way I think the CGT calculation will be calculated:

Period: 1988 to 1997

1. Can you confirm for the period 1988 (purchase) to 1997 (transfer to joint ownership) there is a gain of £31K (45-14)?

2. Can I reduce the capital gain by purchase costs in 1988 and transfer costs in 1997; about £1K? Capital gain reduced to £30K

3. Since these transactions apply before 1998 can this gain be reduced by indexation relief applied to the purchase price, this would raise the purchase price from £14K to £21K? Capital gain reduced to £24K

4. After the transfer to joint ownership in 1997 it seems to me Mother retains her 50% discount on purchase so the gain is split 50:50? My capital gain is £12K.

5. This is the difficult area. Can I claim Primary Residence Relief (PRR)? I do not have legal ownership when the property was purchased in 1988 but I understand it’s called beneficial interest since I contributed to the mortgage costs. I moved back home in 1989 permanently to work in the locality, this is factual I paid towards the household bills, enrolled on electoral register etc. My flat which I owned was up for sale and vacant; impossible to sell because of the negative equity and after 2 years it was sublet in 1991 until 2000. Can I claim partial PRR for any part of the period 1989 to 1997?

6. Alternative to 5. Since my brother and I contributed equally to the mortgage can my capital gain be divided equally 6K each. The capital allowance in 1997 was £6300 and would cancel any gain for both of us.

[Incredulum]

Disagree with all your calculations. At present there is no tax to pay until you sell.

When did you move out (having moved in in 1989)?

If we assume the beneficial interests follow the legal interest (i.e. the names on the title deeds represent who actually owns the house)

1. Your mother's disposal of 50% in 1997 to you is tax free (assuming she had always lived there between purchase and disposal of 50% to you).

2. Your mother's death is entirely irrelevant. The house is not in her estate at all. It belongs to you.

3. What if you were to sell it? Your base cost - i.e. what you spent - appears to be:

1997: 50% x 45k = 22.5k; PLUS either 50% or 100% of the 8k of improvements (to the extent they were improvements, not repairs; if all repairs then 0% of the 8k).
2000: you paid your mother 18k and took on 14k of mortgage. That seems to total 32k, although 50% of £68k = 34k. You should use open market value here.

Therefore your total base cost is 22.5 + 34 =56.5 plus maybe a little more.

The CGT you would incur if you were to sell the property today would be (assuming you didn't live there after 1997) payable on the gain, i.e. the difference between what you receive and the 57k-ish above.

[mullet]

You don't calculate notional gains based on the change of use dates - chargeable gains crystallise when there is a chargeable occasion ... for instance a sale or a gift. Until there is a disposal of the asset there is no CGT.

[Bejay]

Thank you

To account for the discrepancy in the figures I took an additional mortgage advance of £2K in 1998 to finish the house improvements.

Clearly I got it wrong. I thought Capital charges were incurred when property ownership is transferred such as the transfers to joint ownership (1997) and then to sole ownership (2000) and that these charges had to be paid at the time. From what has been said I pay capital charges only when I sell and the base cost combines all capital expenditure to acquire the property and capital improvements and this is set against the market value when I decide to sell in the future. It has been my main residence since 1989 so I can assume I would pay no Capital gains because my Primary Residence Relief will be 100%. Although I’m still not clear exactly when I actually bought the property, was it 1997 when I acquired joint ownership.

I may have got the wrong end of the stick and asked the wrong question. My Mothers probate solicitor had been remarkably vague and it’s likely he’s actually checking these transactions to see if my Mother’s estate has liability for Inheritance tax and Capital Gains tax. Could it be that my Mother has capital gains liability?

I do greatly appreciate your help.