CGT on Freehold

[RobRJBS]

Hi all I would be grateful for some initial advice before I advise my client to seek professional help.

My client has recently lost her husband. He owned a flat (leasehold) and the freehold for the flats.

He left no will and his estate went through probate.

The probate value for the flat was £125k and the land was £50k. She obtained independant valuations for these at the time.

A short while later (at the start of 2011) she sold the flat and freehold to a developer.

As the developer owned the other flat as well he was prepared to pay a premium to buy the whole site and the flat was sold for £200k and the freehold for £300k.

The flat will be subject to PPR so no tax is due but am I correct in saying there will be tax due on the freehold and is there any way the probate value of the freehold can be uplifted?

Many thanks,
Rob

[maths]

What makes you think PPR relief applies to the sale of the leasehold flat?

[RobRJBS]

PPR will apply to the sale of the flat as my client and her late husband lived in the flat for 40 years from when it was bought until it was sold. She was on the electrol roll, had bills adressed to the property etc. so this is not in question.

Another thought that has crossed my mind, because the freehold and leasehold were sold as one, could the whole sale qualify for PPR?

[maths]

The reason I asked was because you stated that the husband owned the flat (not the wife) and on his death he left no will and thus the intestacy rules apply.

[pqtaxation]

The reason I asked was because you stated that the husband owned the flat (not the wife) and on his death he left no will and thus the intestacy rules apply.

Could you please be good enough to expand on your thinking?

Presumably it is that if the surviving wife sold the house in her capacity as personal representative there would be no main residence relief to CGT. But if house had been appointed out to her and she was only such beneficiary (say other beneficiaries, if any, of intestacy received only other assets from husband's estate) would she not enjoy such relief? After 40 years of living there with husband could she assert that she had a beneficial interest in at least the leasehold flat, if not the freehold of the building? A divorce court would presumably think so, though presumably such a contention so as to save on CGT (if not IHT as it is not clear from OP if husband's estate was taxable because there were other beneficiaries of intestacy) might lead to having to submit a revised IHT account.

[maths]

pqtaxation

As no will exists and the size of the husband's estate and who survives the husband is not known the intestacy position is unclear.

If the flat was owned as to, for example,100% by the husband and the property was sold by the PRs, PPR relief could apply but only apply if s225A TCGA 1992 is satisfied which may or may not be the case.

Where the sale is made by the inheriting beneficiary(ies) who take under the intestacy, PPR relief is only possible with respect to that part of the husband's interest which passes to the wife (TCGA 1992 s 222(7)).

Marriage for 40 years and living in the property does not give rise to a beneficial interest therein. With respect to domestic property the beneficial interest follows the legal interest which if the husband was the sole legal owner means that he also owns the beneficial interest (the wife would need to demonstrate that it was always agreed between H and W that she was entitled to a beneficial interest); agreed, in any divorce she would probably be awarded some monetary equivalent or an interest in the property, but this is a different matter.

[pqtaxation]

maths,

Thanks for explanation above. I learnt yesterday of an intestacy where your explanation could be helpful. Why do otherwise sensible people do not bother to have a will!! (rhetorical question)

There are a couple of other threads running here where OP wants to preserve the transferability of a deceased spouse’s NRB by re-directing the disposition to a non-spouse of the only legacy under deceased's will so that it passes exempt to the surviving spouse. The thinking is that the surviving spouse could thereafter make a PET and hopefully survive for the 7 years for the PET to be successful.

But in one of those threads the surviving spouse would re-acquire a 50% share in a second home that the surviving spouse had previously gifted to the deceased spouse.

See: http://www.taxationweb.co.uk/forum/post135117.html#p135117

But what is cost basis for CGT of a future PET of a 50% interest in this second house?

[RobRJBS]

I now have discovered some further details.

The husbands estate was made up solely of the leasehold flat and the freehold land. The whole estate went to the wife as the children waived any entitlement.

Husband died in December 2008 and probate was granted July 2010.

So from July 2010 to early 2011 the property has risen from £125k leasehold and £50k freehold to £200k leasehold and £300k freehold.

Is there any way we can increase the probate value as it was clearly incorrect?

[maths]

You refer to the children (all over age 18?) "waiving their entitlement".

Their entitlement was to the remainder interest of the trust in which 50% of the residue was held on life interest for the surviving spouse plus a 50% absolute interest in the residue.

Did the children disclaim under s 142 IHTA 1984 or execute a DoV under the section with back-dating requests where appropriate?

What was the size of the deceased's estate ie less than £325,000 or more?

[RobRJBS]

Yes they are all over 18 and all I know is they waived their interest, I don't know how.

The estate was solely the property so £175K