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Where Taxpayers and Advisers Meet

Purchase or gift of parents Buy To let - CGT implications

JMW_tax
Posts:16
Joined:Mon Aug 29, 2016 4:29 pm
Purchase or gift of parents Buy To let - CGT implications

Postby JMW_tax » Mon Aug 29, 2016 4:49 pm

Hi everyone,

My parents have now reached the point that they are selling their Buy to let properties, the first of which they have offered me.
They wish to sell it to me with the current tenant who is a problem tenant
(so I would have to go through the legal hassles, unpaid rent, damaged property rather than them (in their late 70's).

So, the property is probably worth £200,000 in good condition and untenanted, and they are thinking that they would be happy to sell it for £150,000 (we would get valualtions from local estate agents for the value with and without the tenant. They purchased it many years ago for about £40,000.
I assume that they would be liable for CGT on the uplift of value from £40,000 to £150,000 (if agent confirms this tenanted valuation).
I also assume that HMRC would take the £150,000 as the purchase price for my tax affairs.
Please confirm.
I also assume that costs incurred in legal expenses and subsequent repairs would be tax deductable from the annual property incomes, rather than on the sale of the property in xyz years time.

My parents are also considering then putting the £150,000 (less CGT) into a tax friendly child account for education of my children - so I assume that would have an implication of gifting and the subsequent 7 year rule.

There is a second option too that my parents are considering - to gift the house to me direct to fund my children's education .
I assume my parents CGT tax liability would be exactly the same - CGT in the uplift in value (tenanted value).
I also assume that HMRC would take the value on the transfer date for calculating my tax liabilities, and then the 7 year gifting rule also applies.

Is my thinking right?

Are there any other options that we could consider?

Many thanks for any advice.

LozaACCS
Posts:1504
Joined:Wed Aug 06, 2008 3:55 pm

Re: Purchase or gift of parents Buy To let - CGT implications

Postby LozaACCS » Mon Aug 29, 2016 8:57 pm

The general rule can be found at S 272 TCGA 1992, the market value is what could be achieved in an open market sale.
Given that the sale is between connected persons, questions may be raised as to whether 50K is a reasonable reduction in the circumstances, bluntly speaking, will it cost 50K to get rid of the problem tenant (I used another phrase but thought better of it).

JMW_tax
Posts:16
Joined:Mon Aug 29, 2016 4:29 pm

Re: Purchase or gift of parents Buy To let - CGT implications

Postby JMW_tax » Mon Aug 29, 2016 10:53 pm

Thanks LozaAccounts,
Pretty much as expected in terms of CGT value. As stated, we would get an estate agent to determine the value as an unemcumbered property in current state, and also the value with the existing tenant / condition.

bd6759
Posts:4262
Joined:Sat Feb 01, 2014 3:26 pm

Re: Purchase or gift of parents Buy To let - CGT implications

Postby bd6759 » Tue Aug 30, 2016 9:28 pm

The cost of bringing the property up to date will be a capital cost, not a revenue cost. It can be set against furture capital gains, not income.

JMW_tax
Posts:16
Joined:Mon Aug 29, 2016 4:29 pm

Re: Purchase or gift of parents Buy To let - CGT implications

Postby JMW_tax » Thu Sep 08, 2016 3:09 pm

Thanks bd6759, I agree that bringing up to date would be future CGT deductions unless doing the property up and then selling in which case it may be classed as trading.

My parents have thrown another suggestion into the pot, which I would appreciate anyone's thoughts over.
So a valuer has seen the property and given these figures: the current value tenanted is £185K, in good condition with no tenant, about £220K and a possibility of a development on the side in which case up lift to £250K and if developed £350K - £375K.

So my parents have suggested, me buying the property for £100,000, removing the sitting tenant and renovating the place, and investigating the development opportunity. Then when complete, selling - so sale price of £250K (done up) or £350K developed. (with me so far?) Then we split any shares over £150K: effectively giving me £50K towards my son's education. So the sale of the property would be this split of £100K PLUS the share of any uplift over £150K.

What is the tax implications on this? What would be the CGT liability? Would it be classed as two disposals - one on the original transfer to me, with a market value of £185K, and then CGT on their profit part - I assume over £185K total for them (so £35K of their share is already covered). Would this then be over two tax years if we did the transfer now, and then resold next year?

I guess as another option (not thought through and off the top of my head), what would be the situation if my parents sold half the property to me and my wife - for say £95K - so then there are four people in equal ownership, then we develop it and sell it. What happens then taxwise?

So may thoughts and complications!

Many thnks for your valuable advice.
Jeremy

JMW_tax
Posts:16
Joined:Mon Aug 29, 2016 4:29 pm

Re: Purchase or gift of parents Buy To let - CGT implications

Postby JMW_tax » Thu Sep 08, 2016 3:11 pm

Also, what stamp duty would be due and when (that we pay, not final sell on which is the purchasers worry)


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