Gift from Parents- Is it CGT liable?

[bca_72@hotmail.com]

I hope someone can please advise me on this!

Almost 10 years ago my mum and dad bought the house I live in for 60K for me to live in at University (they raised the capital against their own property). I have lived in the house for the whole time. It is now worth 180K. My dad would like to 'gift' the property to me on the understanding that I raise a mortgage on it and give my brother the equivalent of their initial outlay to help him onto the property ladder.
My questions are:
1.Can my dad gift this to me as a Potential Exempt Transfer and, providing he survives 7 years avoid Inheritance Tax?
2.Am i exempt from CGT as the house is my PPR?
3. Is there a problem with me raising a mortgage on the property?
None of us intend to make a profit on the property as i intend to continue to live in the house and my parents want no money in return. I appreciate this is a tricky one but I'd be grateful for any initial advice.
Thanks.

[Nigel Lord]

This is a tricky problem without an obviously simple solution. To answer your questions in turn:

1. Yes.

2. No, the house belongs to your parents who do not live there and are therefore not entitled to PPR Relief. As you are connected persons, if they transfer the property to you, it will be treated as being a transfer at open market value giving rise to a chargeable event for CGT purposes. If the transfer was deferred until after 5 April this would roughly give rise to a chargeable gain as follows:

Market Value £180,000

Less:
Cost £60,000
Est. Indexation £8,500
Taper Relief £27,875
Annual exemptions x 2 = £16,400

Net chargeable gain £67,225

The gain would be taxed as your parents' highest income (i.e. at 20% or 40%).

This is clearly an unpalatable solution.

3. You would not be able to raise a mortgage unless you were the legal owner of the property.

This leaves you with a problem. if you transfer the asset you will crystallise a CGT liability, if you do nothing, you will have a potentially higher liability on disposal of the property, or an Inheritance Tax (IHT liability on the death of your parents).

If the property were transferred to a discretionary trust in your favour, it would be possible to defer the gain and to start the 7 year clock ticking for IHT purposes, however, the trust would not be entitled to PPR Relief. It may then be possible to transfer the property out of the trust and again hold over the gain to then enable you to acquire the property without an immediate CGT liability. You would then start to build up taper relief and PPR Relief in your own right.

An alternative solution would be to undertake an IHT planning exercise on your parents' estates and eliminate any exposure on their deaths. They could then retain the house that you live in and pass it to you on their deaths, as there is no CGT on death. This solution could involve your parents raising a mortgage on the property and gifting the capital to you.

In either circumstance you should seek professional advice as the tax planning is complex and could result in unnecessary exposure to tax charges in incorrectly implemented.

My firm specialises in this area and wuld be pleased to act on your families behalf.

Nigel Lord
Lord Associates
Taxation & Business Consultants
Caxton House
Old Station Road
Loughton
Essex, IG10 4PE
020 8418 9101 & 07769 931852
mail@lordassociates.co.uk