CGT on house my mother originally inherited

[cturner]

Hi I wonder whether someone would work out a very rough cgt liability (and iht) on this query


My father died recently. My mother and he had two houses. The second home was inherited by my mother along with her two siblings in 1970 (value ? 20,k).. She bought them out for £50,000 in 1996, when the house was valued at £100,000. My father and her then co owned the house as tenants in common (not the usual husband and wife joint tenants). It is now valued at 500,000.
At present the nil rate band £325k of the estate is left to myself and my sister (pre transferable nil rate band days) , and this could feasibly take the from of dad's half of this house and some cash. However we are inclined to do a DOV so all the estate goes to mother, as there is no real advantage to us having the half house and money from an IHT perspective , and we do not need them now.

If we do this, dad's half of that house goes to mother . If she at a later stage wanted to gift that half to myself and sister ( and as it is not her main home at present, although she does spend time in both properties) :

a) would there be a cgt liability on that half she inherited from husband that she is giving away , and if so would it only be on the gain between date of death and disposal
b) would it be viewed as a gift (and the 7 year rule applies) for Iht purposes? Or is there a complexity in that the DOV redirected this effectively

[Incredulum]

I'm assuming she does not live in the house to which you refer.

a) Yes, only the gain since death.
b) Yes, provided she survives 7 years, it falls outside the estate.

A very clever piece of planning, so the entirety of the 650k remains available (provided she lives 7 years).

[maths]

At present the nil rate band £325k of the estate is left to myself and my sister (pre transferable nil rate band days)

Although you do not state it explicitly, it is common in such cases for the £325,000 value to be left by will on discretionary trust for various beneficiaries and not outright as an absolute gift ?

[cturner]

At present the nil rate band £325k of the estate is left to myself and my sister (pre transferable nil rate band days)

Although you do not state it explicitly, it is common in such cases for the £325,000 value to be left by will on discretionary trust for various beneficiaries and not outright as an absolute gift ?

no for some reason it was not as a discretionary trust.

My concern was that the hmrc instrument of variation checklist (IOV2)states a similar example where the sons inherit but redirect via DOV to mother who then gives them it back in another form - they say this variation will as not be treated as if the deceased had made it - but i cannot undertand why as you are not gaining in anyway

[cturner]

I'm assuming she does not live in the house to which you refer.

a) Yes, only the gain since death.
b) Yes, provided she survives 7 years, it falls outside the estate.

A very clever piece of planning, so the entirety of the 650k remains available (provided she lives 7 years).

Thaaks. No , but she does visit it for holidays, and it has been a holiday let in the past

[pqtaxation]

.... My concern was that the hmrc instrument of variation checklist (IOV2)states a similar example where the sons inherit but redirect via DOV to mother who then gives them it back in another form - they say this variation will as not be treated as if the deceased had made it - but I cannot undertand why as you are not gaining in anyway

That example at footnote 8 of IOV2 form you mention is there to make clear that no consideration or compensation should be paid to those executing the IOV for doing so {IHTA s142(3)}. For example, where an estate is liable to IHT, then say changing the disposition by DoV of a £1m gift net of IHT to adult children under the deceased spouse’s will to surviving spouse would mean the surviving spouse could afford to pay the children the £1m and upto £666k of IHT saved (= £1m/0.6-1) as consideration if she was the sole residuary beneficiary, as the estate residue pays the IHT, before becoming worse off.

But you are contemplating executing a DoV for only up the amount of your father’s NRB so as to preserve transferability of his full NRB to his wife's estate on her death; my understanding is that HMRC regard that as allowable planning as no IHT is mitigated (avoided) on first death. But you should instruct an appropriate solicitor to prepare the DoV and take his advice this point before your mother gifts you anything.

Looking at your OP there may be a couple of minor wrinkles in your thinking over cost basis.

As I understand your OP, your parents never nominated the house as their main residence and the values you have are:

1970 inherited by 3 siblings when entire value was £20k. Not clear if your mother (wife W) inherited an interest of one third or one half.

31 March 1982: cost rebased for future CGT calculations; but estimated entire market value is not given by you as of that date.

1996: W bought out interest (one half or two thirds?) of her 2 siblings for £50k and so owned entire house which was valued at £100k.

1996-2010- W transferred 50% to husband (H) who took on W ’s cost base and H and W each owned one half as TiC (documentation of purchase and transfer should be checked -- if H’s beneficial interest was higher that would help uplift cost basis passing under his will/DoV)

2011 H died. The value of his (50% beneficial) interest may be different for IHT and CGT (see below).

So what is the base cost of 50% that was retained by W (your mother)? To calculate that you’ll need to estimate the 1982 open market value and clarify the proportional interest in house that was bequeathed to each sibling in 1970. I’m no expert in cost pooling rules in UK but believe the 50% interest gifted to H after 1996 would simply be 50% of acquired costs in 1970 and 1996 (rather than last in first out, first in first out and/or indexed) so retained 50% of W would be the same base cost.

For the 50% interest of H passing, the base cost will either be the ascertained cost agreed by HMRC (but unlikely to be ascertained if DoV is executed because of spouse exemption) or its (unascertained) probate value (50% of open market value as related property IHTA 1984 s161) less a discount (usually 10%) for a partial interest .

[cturner]

it was split 3 ways in 1970

the estimated cost in 1982 is 30k

I dont really understand CGT much, and this seems complicated but
Is the essence of this that the inherited 50% share from H to W, would only be liable to CGT on increase in value of that 50% (250k = 50% probate valuation) between acquisition and gifting - ie very little, if anything, if that was a short period


Thanks for your help

[pqtaxation]

... it was split 3 ways in 1970 .... the estimated cost in 1982 is 30k

I dont really understand CGT much, and this seems complicated but
Is the essence ... that the inherited 50% share from H to W would only be liable to CGT on increase in value of that 50% (250k = 50% probate valuation) between acquisition and gifting - i.e. very little, if anything, if that was a short period

The CG/IH taxation aspects may not be as simple as you might hope because, by your re-directing H’s 50% interest to W by DoV, W becomes owner of the entire interest in second home again.

For her (W) to gift thereafter to you (children) a 50% interest with a cost basis of the uplifted (to 90% or more of market) probate value would imply the use of LIFO (last in first out) cost accounting. I suspect (but don’t know) average base cost would apply as calculated below.

However there has to be some anti-avoidance restriction on a healthy spouse gifting all assets to the spouse on latter’s deathbed whose will bequeaths them back to surviving spouse at uplifted market value – indeed is there an uplift in base cost for CGT in such circumstances?

There might also be an effect from W having previously owned the part of the asset (second home) but deriving a benefit from using it all.

But it’s late at night/early morning where I am abroad (and I'm having a crash course in its estate duty taxation of this and another country) and sleep is just about on me. So can someone with greater knowledge of UK taxation in this area, and who is wide awake, please take on this query to provide the answer?

Base Cost Analysis

1976 W inherits 1/3 interest

March 1982 cost base uplifted to then market value of say 30,000 *1/3 less say 12.5% discount for 1/3 interest =£8750

1996 Buys 2/3 share of other 2 interests for £50,000 before other acquisition costs – legals, stamp duty- to make cost basis £58,750

1996-2010 W Gifts 50% interest to H who takes on her cost base of 58750/2 =£29,375

2011 H died and his 50% is valued at £250,000 for probate (related property) but at discount of say 10% for CGT (= £225,000) if value not ascertained because of spouse exemption.

Passes to W to re-unite 100% interest on one person with base cost of 29,375+225,000 = £254,375

So base cost of 50% interest = 254,375/2 = 127,183

Deemed Gain on gifted disposal of 50% interest = (500,000 market value– 254,375)/2 =122,812

[pqtaxation]

... My concern was that the hmrc instrument of variation checklist (IOV2)states a similar example where the sons inherit but redirect via DOV to mother ...

Just a further thought --maybe a case of my not seeing the wood for the trees in my tiredness last night.

If your (you and your sister) legacy under your father’s will is to the value of the NRB at time of his recent death (viz £325k) and the remainder of his estate passes into residue for the benefit your mother, then you could simply renounce your legacy, rather executing DoV, so as to increase residue and preserve transferable NRB?

Does not change query over what is the cost basis for CGT of the second home that will be owned entirely by your mother.

[Incredulum]

[For her (W) to gift thereafter to you (children) a 50% interest with a cost basis of the uplifted (to 90% or more of market) probate value would imply the use of LIFO (last in first out) cost accounting. I suspect (but don’t know) average base cost would apply as calculated below.

I agree. There is only one asset, which is enhanced by the addition of the 50%. Upon a disposal the normal part-disposal rules apply and so it's an averaged base cost.

However there has to be some anti-avoidance restriction on a healthy spouse gifting all assets to the spouse on latter’s deathbed whose will bequeaths them back to surviving spouse at uplifted market value – indeed is there an uplift in base cost for CGT in such circumstances?

Does there?