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Where Taxpayers and Advisers Meet

CGT on rented-property owned by parents

smfarnsworth
Posts: 5
Joined: Wed Sep 09, 2015 1:00 pm

CGT on rented-property owned by parents

Postby smfarnsworth » Wed Sep 09, 2015 1:15 pm

In a nutshell - my parents bought a house (A) in the mid-1970's which my grandmother lived in until she died about 25 years ago (it is mortgage-free). Since then they have lived in their own house (B) and rented out house (A). As they grow old we've taken the decision to sell our house (C) and their house (B) and buy a new house together (D) - for which they will put in the proceeds of their house sale (B) and we'll pay the mortgage on the difference - so far, so good - everything is clear and we're fine.

However - house (A) is still owned by my parents. It is mortgage-free and we want to get a buy-to-let mortgage on it to fund some extension work on the new house (D). My parents are too old to get a mortgage on it and they don't want to sell it. They are however happy to give/gift/pass the house over to us. I understand that after owning it for 6-months we can then apply for a buy-to-let mortgage on it.

Our issue therefore is what will be liable for CGT-wise? They think they bought the house for about £1,200 in the 1970's and it's a basic 2-up/2-down terrace house worth about £80,000 in today's market. Taking £1,200 from £80,000 leaves 78,800 and at 18% does that make me liable for £14k tax???

I understand that me and my wife can both own it and apply our own tax-free allowances etc - but I still don't really understand it. Plus - 40-50 years down the line when we pass on - will my daughter be faced with paying CGT AGAIN. If so, can she be a joint-owner now (in some for of trust - she's only 9) - so avoid that or is CGT applied every time a property is bequeathed/given.

I appreciate I will have to engage the services of a professional - but I'm just looking for some general guidance.

Cheers

Stephen

section 44
Posts: 4468
Joined: Thu Oct 30, 2008 12:47 pm

Re: CGT on rented-property owned by parents

Postby section 44 » Fri Sep 11, 2015 12:36 pm

In a nutshell - my parents bought a house (A) in the mid-1970's which my grandmother lived in until she died about 25 years ago (it is mortgage-free). Since then they have lived in their own house (B) and rented out house (A).
The implication appears to be that your parents never lived in house A, although you don't actually say where your parents lived prior to when your grandmother died 25 years ago.
CGT applied every time a property is bequeathed/given.
CGT should be considered each time a property is disposed of.

smfarnsworth
Posts: 5
Joined: Wed Sep 09, 2015 1:00 pm

Re: CGT on rented-property owned by parents

Postby smfarnsworth » Fri Sep 11, 2015 12:44 pm

Hi, yes, sorry - my parents have lived in house (B) FOREVER - but bought house (A) as an investment 10 years or so into their marriage. They bought it with an elderly sitting tenant who paid a paupers rent. When he passed on the timing fitted in with my grandmother moving and so she sold her house and moved into house (A).

So they've owned house (A) for about 35-40 years now but have never lived there.

They've had a number of tenants, some of which have left the house is a disgusting state - so have had to refurb it numerous time. However the current tenants (of 15-20 years) have been lovely. The house has just been re-roofed and had new windows/doors

section 44
Posts: 4468
Joined: Thu Oct 30, 2008 12:47 pm

Re: CGT on rented-property owned by parents

Postby section 44 » Fri Sep 11, 2015 12:56 pm

Our issue therefore is what will be liable for CGT-wise? They think they bought the house for about £1,200 in the 1970's and it's a basic 2-up/2-down terrace house worth about £80,000 in today's market. Taking £1,200 from £80,000 leaves 78,800 and at 18% does that make me liable for £14k tax???
You wouldn't be liable for tax on a disposal by your parents, however they may have a CGT liability that would potentially be reduced by any used annual exemption that they have.

smfarnsworth
Posts: 5
Joined: Wed Sep 09, 2015 1:00 pm

Re: CGT on rented-property owned by parents

Postby smfarnsworth » Fri Sep 11, 2015 2:39 pm

Thanks Section-44

What I want to know specifically though - is if my parents give/gift me that house for nothing (so no money changes hands) - am I (or they) liable for any Capital Gains Tax? If so, how much? We don't want to sell the property - simply draw money down on it via a buy-to-let mortgage...

section 44
Posts: 4468
Joined: Thu Oct 30, 2008 12:47 pm

Re: CGT on rented-property owned by parents

Postby section 44 » Fri Sep 11, 2015 2:45 pm

if my parents give/gift me that house for nothing (so no money changes hands) - am I (or they) liable for any Capital Gains Tax?
Yes your parents would be treated as disposing of the property at market value and may have a chargeable gain. They should be entitled to offset any unused annual exemption to reduce any CGT liability.

smfarnsworth
Posts: 5
Joined: Wed Sep 09, 2015 1:00 pm

Re: CGT on rented-property owned by parents

Postby smfarnsworth » Fri Sep 11, 2015 2:47 pm

Thank you... I guess I should get myself a reliable tax advisor to do the paperwork then... It sounds like a nightmare...

King_Maker
Posts: 6538
Joined: Wed Aug 06, 2008 3:22 pm

Re: CGT on rented-property owned by parents

Postby King_Maker » Fri Sep 11, 2015 3:47 pm

If your grandmother lived there before 6 April 1988, then Dependent Relative Relief may be available.

[Note : CGT is a tax on DISPOSALS - which includes gifts as well as sales.]

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

Re: CGT on rented-property owned by parents

Postby LozaACCS » Fri Sep 11, 2015 5:49 pm

A gain will arise (as already noted) based on the sales proceeds or market value on disposal less the market value at 31 March 1982,(not the original cost).
There may be relief for any capital expenditure and as King Maker points out DRR.
I do think there may be an exposure to income tax under the pre owned asset tax rules.
If your parents sell the property and gift the cash to you, which is then used by you to buy a property in which they then live, then they will have a PET for IHT purposes, the tracing rules for a GWR will not apply unless the gift was on condition that the property was acquired.
The gift will however meet the contribution condition for POAT and an income tax charge would arise.
If however the new property was purchased jointly then the relief offered at S102(b) FA 1986 would shield against either a GWR or POAT charge, (for as long as you live there)
The capital gain on the property could be held over if the gift were made into trust, this would however make borrowing against it difficult.

smfarnsworth
Posts: 5
Joined: Wed Sep 09, 2015 1:00 pm

Re: CGT on rented-property owned by parents

Postby smfarnsworth » Fri Sep 11, 2015 7:06 pm

I think I'm confusing two issues....

We're 100% not selling house (A) (my grandmother's house). We are however selling house (B) - their primary residence and the proceeds of the sale are going into house (D) - which will be owned by me and my wife (as the mortgage owners). My understanding is that so long as they live for 7 years or more - then the money they put into the property from the sale of the house is untouchable. I have no concerns about houses (B) or (D) at all.

Rather than got bogged down - I need to find a financial/tax consultant in the Manchester area that I can hire to sort this all out for me...!


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