CGT query

[Janie1]

Myself and my sister inherited our grandmother's flat last year. My grandmother was moved into sheltered accommodation a year before she died and her flat was rented out. The tenants stayed on after she died and are still there. Prior to my grandmother dying and the tenant moving in myself and my sister spent about £8 to make it rentable. It needed an updated kitchen and bathroom, complete redecoration and some damp fixing etc.

My question is, can this be offset against Capital Gains Tax when we sell it? What would we be liable for? My sister doesn't earn and I only work part time and earn about £10k per year. I am guessing the flat is currently worth maybe £140k.

Many thanks,

Jane

[Janie1]

and also this is the first year we are declaring rental income, can we offset the money spent on the flat against our income tax this year?

Thank you so much in anticipation of your response!

[pqtaxation]

Prior to my grandmother dying ... myself and my sister spent about £8 to make it rentable.

My question is, can this be offset against Capital Gains Tax when we sell it? I am guessing the flat is currently worth maybe £140k.

...this is the first year we are declaring rental income, can we offset the money spent on the flat against our income tax this year.

A similar query came up recently.

As you did not own the flat until after your Gran died, you (plural) obviously can’t add any of the £8k to your inherited cost for your (individual) future CGT computation when you come to sell the flat. That inherited cost was market value at her date of death and that value – presumably around £140k- would have been entered on her IHT account by her executor and would reflect the improvements (both capital and decorative) you paid for. Hence some part at least of the cost of those improvements you paid for is included in your base inherited cost.

Neither can you set any of your pre-death spending against post death rental income though possibly your Gran (or rather her executor) could do so.

Rather the analysis runs along the following lines: that you lent Gran ca. £8k to improve/renovate flat prior to her being able to rent it out which rental income was hers. That debt was owed to you by her estate upon her death. But that analysis and result may not sit comfortably with any other beneficiaries of the residue of her estate in which case there is a discussion and possibly an agreement to vary the will to net out repayment of the debt from your share of residue. If there are no other residual beneficiaries no discussion/variation is required.

[Janie1]

Thank you so much for your response. What you are saying is true, she did get the rental income, so in effect we were lending her the money for renovation. The flat was her estate, she didn't leave any extra money that i could have reclaimed the renovation costs that we lent her from and there will not obviously be any money until said flat is sold for me to reclaim. Me and my sister put in £4k each so are in exactly the same position and are the only beneficiaries of the will.

I am being completely thick and don't understand how varying the Will will help us? Could you elaborate.

Many thanks,

Jane

[pqtaxation]

The possibility of varying the will would only have relevance if there were other beneficiaries of Gran's estate. In the circumstances you describe it has no relevance.

[Janie1]

So are you saying that I can claim the lent money back against rental income if this is the case? Sorry if I sound stupid. Tax is not my strong point!

[pqtaxation]

So are you saying that I can claim the lent money back against rental income

No I'm not saying that and, to be clear, your loan is not deductible against your rental income from after the transfer of ownership of the flat to you or the rental income of her estate/personal representative during the period between her death and that transfer to you,

But with regard to rental income arising before her death, was the maintenance (not capital improvements) part of the expenditure incurred after she went moved out of the flat into sheltered accommodation in preparation for the flat being rented out deducted on her tax return from her rental income? It not an amended return could be submitted so to re-claim part of the tax she paid. But it could be that her pension and rental/other income were in total less than her age adjusted personal allowance in which case no income tax was payable by her and so there is no point in submitting an amended tax return for her to include such costs against her rental income. If her rental income has been reported to HMRC than, depending on its value, overdue returns may be required - however reporting rental income and overdue self-assessments are not my areas.

Concerning your capital/loan, the accounting analysis is: You lent Gran the money, she died owing that loan to you (but her death estate you say has insufficient cash to pay you back so you write off that debt) and you inherit the flat at its market value at the date of her death (which value presumably reflects part, if not all, of the pre-death expenditure you financed to make the flat rentable).

[pqtaxation]

.... If her rental income has not been reported to HMRC than, depending on its value, overdue returns may be required - however reporting rental income and overdue self-assessments are not my areas.

Sorry, the word "not" was omitted in my penultimate post. Now included in above extract (with emphasis).