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Where Taxpayers and Advisers Meet

GCT and Inheritance tax

medic
Posts:7
Joined:Wed Aug 06, 2008 3:05 pm

Postby medic » Tue Sep 30, 2003 4:48 pm

Hi to all,

We have aproperty which my husband and I live in.
We purchased a 2nd property which my son lives in this property has a small mortgage attached to it.
We recently purchased a 3rd property which my daughter lives in this property does not have a mortgage attached to it.
We also have aspanish property which does not have a mortgage attached to it.

Would we be liable for GCT if we sold the two properties which our children live in and if so what would be the way round to avoid this happening?

What would be the best way to avoid the Inheritance tax?

Property 1 worth 200,000
property 2 sons 50,000
property 3 daughter 30,000
spanish property 160,000

Thanks

Nigel Lord
Posts:518
Joined:Wed Aug 06, 2008 2:18 pm

Postby Nigel Lord » Tue Sep 30, 2003 11:22 pm

Medic

CAPITAL GAINS TAX (CGT)

You and your husband own four residences, of which Property 1 appears to be the only main residence. I will address the CGT treatment of each proerty in turn.

Property 1

Assuming that this is you main residence and has been so since it was acquired, it will qualify for 100% Principal Private Residence (PPR) Relief on disposal thus eliminating any charge to CGT.

Properties 2 & 3

As you and your husband have not lived in these properties, no PPR Relief would be due. On any disposal or transfer to your children (other than at your deaths) a CGT charge would arise subject to some minor reliefs (annual exemptions, non-business asset taper etc.).

As your children reside in the properties, and it is presumably your intention for them to inherit in the fullness of time, you may wish to consider gifting the properties into a discretionary trust. This would enable you to defer any capital gains tax charge and, providing your son and daughter were beneficiaries, the trustees would eventually qualify for full PPR relief thus entirely eliminating any gain. This arrangement would also enable you and your husband to continue to control the assets.

Spanish Property

It is unclear whether this is a holiday let or a second home, and the amount of time spent there will affect any planning strategies. Assuming that it is let or rarely visited, any gain on disposal would be fully chargeable to UK CGT if you are UK resident or ordinarily resident at that time. There may also be local taxes to pay (subject to double tax relief). If you spend a substantial amount of time at the property or intend to do so in the future, it may be possible to make a PPR election so that this is your main residence for CGT purposes. This could substantially reduce the gain.

INHERITANCE TAX (IHT)

You do not state what you whole estate is worth. The stated values of the four properties (£440,000 less a small mortgage) would give rise to IHT of £74,000 on second death at present rates.

If you gift properties 1 & 2 to the discretionary trust, and survive for 7 years, these would leave your estates for IHT purposes resulting in a saving of up to £32,000. The proportion that would leave your estates if you died within 7 years would be as follows:

0 - 3 years = 0%
3 - 4 years = 20%
4 - 5 years = 40%
5 - 6 years = 60%
6 - 7 years = 80%
7 years + = 100%

It would also be possible to gift some or all of your interest in the Spanish property into trust thus reducing your exposure further.

If you have not already done so, you should consider making IHT efficient wills which would ensure that the nil rate band (presently £255,000) of the first spouse to die is fully utilised.

You should take professional advice prior to implementing the trust arrangements or the suggested will planning.

If you require any further assistance please do not hesitate to contact us, and we will be happy to act on your behalf.

Nigel Lord
Lord Associates
Taxation & Business Consultants
Caxton House
Old Station Road
Loughton
Essex, IG10 4PE
020 8418 9101 & 07769 931852

medic
Posts:7
Joined:Wed Aug 06, 2008 3:05 pm

Postby medic » Wed Oct 01, 2003 1:29 pm

Thanks for your prompt reply.

What if we simply transferred the title deeds to both children would they be liable for any GCT if we then sold the properties?

If not what would the likely chargeable CGT amount be?

If we decided to use the discretionary trust route could we sell the properties the children reside in before our death?

Should we put the villa in Spain into the chldrens names as the owners when it is completed?

Would setting this up be costly?

I might have to contact you for your advice.

Thanking you.

Nigel Lord
Posts:518
Joined:Wed Aug 06, 2008 2:18 pm

Postby Nigel Lord » Thu Oct 02, 2003 6:02 am

Medic

I assume that you mean the properties in which the children reside?

If you simply transferred the beneficial ownership (legal title is irrelevant for tax purposes) this would be deemed as a transfer at open market value, and you would be liable to CGT on the resulting gain, net of any available reliefs. As the properties are of modest market value, the gain may be covered by annual exemptions (£7,900 per annuam). Your children would be treated as having acquired the properties at open market value. If they resided in them throughout ownership, they would be entitled to full PPR Relief and no taxable gain would arise.

If you want an indication of gains and tax rates, please supply details of the dates of acquisition and costs; and anticipated dates of disposal on proceeds.

If you used the discretionary trust route, the properties would be owned by the trust. The trustees could sell the properties at any time. If you wished to be able to benefit from the sale the transfer into trust would be ineffective for IHT purposes due to the Gifts with Reservation Of Benefit (GROB) rules. If you were excluded from benefiting from the trust, the transfers would be IHT effective but you could not (personally) receive any sale proceeds.

It would be most pragmatic to transfer the Spanish property to the children, or a trust in their favour, prior to completion (i.e. at a lower market value). You also need to be aware of Spanish IHT and CGT which are prohibitive.

I am sorry that this is so complex. That is the nature of the beast.

Please feel free to contact me direct.

Nigel Lord
Lord Associates
Taxation & Business Consultants
Caxton House
Old Station Road
Loughton
Essex, IG10 4PE
020 8418 9101 & 07769 931852

medic
Posts:7
Joined:Wed Aug 06, 2008 3:05 pm

Postby medic » Fri Oct 03, 2003 4:41 pm

Where would I be able to find out more about the GROB rules you mention Nigel?

Would the £7,900 you mention as annual exemption be available to both my husband and myself for each year of ownership on the properties the children live in?

Greatful for your reply

Nigel Lord
Posts:518
Joined:Wed Aug 06, 2008 2:18 pm

Postby Nigel Lord » Tue Oct 07, 2003 12:25 am

Medic

The following is an extract from the Revenue's publication on IHT

"What is a ‘gift with reservation of benefit’?

A gift with reservation of benefit is one that is not fully given away so that either
• the person getting the gift does so with conditions or restrictions attached, or
• the person making the gift keeps back some benefit for themselves.
Where this happens to gifts made on or after 18 March 1986, we can include the
assets as part of your estate but there is no seven year limit as there is for
outright gifts.
A gift may begin as a gift with reservation but some time later the reservation
may cease.

Example
If you give your house to your child but continue to live there rent free, that would
be a gift with reservation. If after two years you start to pay a market rent for living
in the house, the reservation ceases when you first pay the rent. The gift then
becomes an outright gift at that point and the seven year period runs from the date
the reservation ceased.

Or a gift may start as an outright gift and then become a gift with reservation.

Example
If you give your house to your child and continue to live there but pay full market
rent, there is no reservation. If over time you stop paying rent or the rent does
not increase, so it is no longer market rent, a reservation will occur at the time the
rent stops or ceases to be market rent.

Our statement RI55 sets out different examples of gifts where we consider that any
benefit or interest retained is not enough to make the gift one with reservation of
benefit. Please ask our Helpline (details are on page 1) for a copy of this statement,
to help you decide how to treat the gift. The statement also explains what happens if
the reservation ceases before the death of the person making the gift."

The annual exemption (£7,900) is only available to offset against gains arising in the same tax year. Therefore you, and your husband would only have one exemption each. (I.e. you cannot carry forward unused exemptions). If you sold the properties in two different tax years, this would allow the use of a second years' exemptions.

Nigel Lord
Lord Associates
Taxation & Business Consultants
Caxton House
Old Station Road
Loughton
Essex, IG10 4PE
020 8418 9101 & 07769 931852

iheath
Posts:1
Joined:Wed Aug 06, 2008 3:37 pm

Postby iheath » Wed May 10, 2006 8:24 am

Hi, as this thread is now a little old, can you tell me if the the Discretionary Trust route is still available under current law and any extra information you can give about it.

Nigel Lord
Posts:518
Joined:Wed Aug 06, 2008 2:18 pm

Postby Nigel Lord » Fri May 12, 2006 1:05 am

Medic

You have unwittingly created a situation whereby you have exposure to both CGT and IHT charges.

There are solutions to the double charges in respect of all of the properties other than the main family home, but you will need to act quickly as the solution for the properties occupied by your children will become progressively more expensive, and you must act in respect of the Spanish property within 2 years of it first becoming available for
occupation.

The solution in respect of your childrens' homes requires the use of a certain type of discretionary trust which is relatively inexpensive to establish and run.

The solution in respect of the Spanish property requires a Principle Private Residence Election which then may be varied to achieve maximum protection of both this and your UK residence.

You will require professional assistance in dealing with these matters as the potential pitfalls of incorrectly applied strategies will inevitably have ab adverse tax effect, and may make your situation worse.

My firm specialises in this type of work. If you would like further assistance we will be happy to act on your behalf.

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

Nigel Lord
Posts:518
Joined:Wed Aug 06, 2008 2:18 pm

Postby Nigel Lord » Fri May 12, 2006 1:32 am

ihealth

Sorry. I read the trhreads to wrong way around.

Yes, the discretionary trust route is still available, but there are two additional hurdles to overcome.

Firstly, you cannot extinguish any gain that has arisen in the intervening period, only future gains. Scondly, there may be some Stamp Duty Land Tax (SDLT) issues.

Please feel free to let me have full details and I will advise on whether it is sensible for you to proceed.

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


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