CGT on inherited property that I intend to let

[Dave N]

Hi,
My mother died 1 year ago leaving her small estate to me which included a mortgage free flat worth £150k.
The flat has been up for sale for 9 months but with the current housing market being as it is, it is not gaining much interest.

My intention was/is to let out the property until the 1st time buyer market picks up, however this has generated a few questions in my mind;

1)is the property currently exempt from CGT due to it being inherited ? If it is how long does the exemption last for ?

2) as a higher rate tax payer, should I transfer the property to my wife who is in the lower tax bracket ? And if I do what are the implicated in terms of CGT now and when I eventually sell the property ?

3) would there be other taxes I would be liable for by transferring the property to her ?

Many thanks
Dave

[mullet]

1. No. But you inherited it at market value (known as probate value) at date of death. So if you sell it soon after inheriting there is unlikely to be any CGT. That is why many people think that inherited assets are exempt from CGT. They are not, but liability may not arise in a steady market.

2. Yes, that could be wise. There is no CGT for you on the transfer because the transfer of an asset between spouses (or civil partners) is deemed to be a no gain/no loss transaction. In simple terms your wife will take on your base cost, i.e. probate value. "When I eventually sell the property" would not then apply, for it would be your wife selling her property. In simple terms the gain would be calculated as sales proceeds less costs of disposal less probate value.

3. No.

[Dave N]

Thanks very much for your help mullet.

Would I be correct in assuming that the rental paid to my wife would be subject to lower income tax band rates and that CGT at point of future sale would be at 18% (at today's rates) as opposed to rent at 40% and CGT of 28% if the property remained in my name ?

Any idea of the current fee involved for this type of transfer ?

Many thanks again
Dave

[mullet]

Would I be correct in assuming that the rental paid to my wife would be subject to lower income tax band rates and that CGT at point of future sale would be at 18% (at today's rates) as opposed to rent at 40% and CGT of 28% if the property remained in my name ?

Yes. But your wife would be liable at 18% only to the extent of her available basic rate band - 28% thereafter.

Any idea of the current fee involved for this type of transfer ?

Not personally. Others will have an idea, but not necessarily today (some people aren't as sad as me and ignore this site at weekends).

[pqtaxation]

....

2. Yes, that could be wise. There is no CGT for you on the transfer because the transfer of an asset between spouses (or civil partners) is deemed to be a no gain/no loss transaction. In simple terms your wife will take on your base cost, i.e. probate value. "When I eventually sell the property" would not then apply, for it would be your wife selling her property. In simple terms the gain would be calculated as sales proceeds less costs of disposal less probate value. ....

Sadly I'm also a Sunday reader though only because as I’m killing time at an airport.

Mullet counsels it is “ wise…. and… simple” as above. But sadly it is possible OP and his wife may separate though that does not seem likely now.

Hence suggest OP should retain legal ownership of inherited flat and transfer only beneficial ownership by deed (prepared by qualified professional person) to meet requirements of Form 17 (many previous threads on this topic on this forum). From the OP, the circumstances appear that mother’s estate was not liable to IHT and so the open market value (OMV) of flat on was not agreed (“ascertained” in HMRC jargon- again see previous threads on this topic on this forum including one in last few days I posted on). Estimated OMV is inherently an uncertain number and is usually expressed as the mid-point of a range of values typically plus or minus 5%, sometimes 10% (especially in the current market) and selection of a number towards the high end of range can help mitigate any future liability to CGT. But in this case as mother’s death was a year ago her IHT account 205 has probably been submitted to set probate value. Were a taxable gain be expected at time of sale, the transfer back to OP of a part of beneficial ownership prior to contract would make available both spouses' annual exempt amount to capital gain.

So the procedure may not be quite so simple as suggested if OP wishes to be wiser.

[Dave N]

Thank you pqtaxation, you are correct an estimate was used on the value of the property and it was c£10,000 below the home report valuation.

By doing this transfer of beneficial ownership I assume that tax paid on any rent collected would be at my wife's rate and not my own ?

Who would need to register as landlord in this arrangement ?

Many thanks

[Dave N]

Pqtaxation, would i be correct in assuming that the solicitor who completed probate on my mothers estate be qualified to do this or should I be seeking another professional who specialises in taxation ?

Thanks again

[pqtaxation]

In a rush, so responding very quickly:

Check with that solicitor over IHT liability of your late mother. If none, you don't want an "undevalue" of house as that probate value is prima facia the base cost for calculating any future capital gain.

Yes, tell that solictio you intend to file Form 17 and want a deed to transfer (say) 99% of beneficial interest to your wife so that (say) 99% of rental income is income taxed to her (to you only remaining 1%).

[Ian McTernan CTA]

And of course make sure that both the wife and your Wills are up to date following any changes made and assets gained from your mother.

[Incredulum]

But sadly it is possible OP and his wife may separate though that does not seem likely now.

Hence suggest OP should retain legal ownership of inherited flat and transfer only beneficial ownership by deed (prepared by qualified professional person) to meet requirements of Form 17

Is that so? I am no property lawyer (nor a divorce lawyer nor a trust lawyer), but I am astonished that possession of merely legal interest makes any difference at all. Doesn't this violate the entirety of trust law? Are you sure?