Capital Gains Tax & Gift Tax

[AliRoger]

Hi,

I would be grateful if you can kindly shed some light into my query?
- I own two properties, BOTH are mortgage free.
- Property-A is my main residence.
- Property-B was occupied by my late brother ONLY, and paid no rent during his lifetime.
- Property-B was purchased for £220,000, and now worth £450,000.
- My late brother was divorced with 3 children.
- I’d like to sell Property-B, and give EQUAL shares (i.e. proceeds of the sale) to his 3 children.

Questions:
1. Will there be double tax to pay i.e.
a. Capital Gains Tax, once the Property-B is sold?
b. Gift Tax, for giving cash to his children from the proceeds of the sell?

2. His younger child is 16 therefore, can I make a cash gift of over £3000? If not, what is the best way?

3. Any other points to consider?

Appreciate any pointers or an advice to the above.

Many thanks.
Roger.

[iwmtaxadvisor]

Hello, interesting question. Broadly, without any tax planning, you're gifting the next generation so you would expect to pay IHT if your total gifts in the last seven years exceed the nil rate allowance currently 325k. Again, broadly, if you exceed the gains tax allowance 12.3k you'd expect to pay gains tax. It doesn't have to be this way - you can reduce the taxes with some planning (and it seems to be well worth the likely fees).
Qu. 1a) Capital Gains Tax, once the Property-B is sold? Yes
Qu. 1b) Gift Tax, for giving cash to his children from the proceeds of the sell? Yes, but see above so maybe no tax to pay.
Qu. 2) His younger child is 16 therefore, can I make a cash gift of over £3000? If not, what is the best way? Yes. See above (gifts up to the nil rate band exemption) in terms of IHT payable'
Qu. 3) Any other points to consider? Well, many.

A Behavioural economics. You've assumed we all know your objectives and I'm not sure we do. Is there a purpose you have in mind for the money? If they spent it on ... say... parties... would that be fine with you? If all three get 60k, would you say 'you have to use this in a particular way'? Your answer determines if you should ring fence the gift in some way.
B Lettings relief If you ever lived in the house as your main residence then you can claim lettings relief on the gain even though no rent was charged. Since this is a relief worth thousands to you, you should consider the history carefully.
C. Gift into discretionary trust defers gains tax can claim for holdover relief i.e. no gains tax until the property is eventually sold by the trust.
D. Lifetime gift total is? For the record I think you'd have to claim that the no-rent gift you made to your brother year by year was exempt for IHT 'out of normal expenditure'. If you don't do this, you'll have to rethink what your lifetime cumulative total is (in the last seven years) and that will affect your planning.
E. Effect on own IHT Lifetime gifts as you plan changes the computation of IHT on your own death. Maybe you want to go through those numbers and take advice if you have a problem
F. Who owns the house? If you're married, is there reason to say House B was bought jointly (ignoring the title for the moment)

Hope that helps. My guess is that 40k+ of tax is at stake. I think you can reduce that. I think you can be smart about the gift too, in how it is applied to get the best result in human terms.

[maths]

Point B of tax advisor's response is incorrect. The "old" Lettings relief to which he refers has been abolished.

Point C, gifting into a DT, is unlikely to be of use if you basically want the three children to get their cash now as presumably is the case as they are all over 18 (?).

Point D ie renting g out a property "rent free" gives rise to no IHT charges.


Unfortunately, selling property B will give rise to a substantial capital gain. If you are married and you make a gift to her of part of property B you would get an extra annual exempt amount which would save a small amount of CGT.

Selling parts of a property over time is often suggested isn order to use more than one annual exempt amount thus lowering overall CGT. However, again. this is of no use of the kids want all of their money now.

[AliRoger]

Hello, interesting question. Broadly, without any tax planning, you're gifting the next generation so you would expect to pay IHT if your total gifts in the last seven years exceed the nil rate allowance currently 325k. Again, broadly, if you exceed the gains tax allowance 12.3k you'd expect to pay gains tax. It doesn't have to be this way - you can reduce the taxes with some planning (and it seems to be well worth the likely fees).
Qu. 1a) Capital Gains Tax, once the Property-B is sold? Yes
Qu. 1b) Gift Tax, for giving cash to his children from the proceeds of the sell? Yes, but see above so maybe no tax to pay.
Qu. 2) His younger child is 16 therefore, can I make a cash gift of over £3000? If not, what is the best way? Yes. See above (gifts up to the nil rate band exemption) in terms of IHT payable'
Qu. 3) Any other points to consider? Well, many.

A Behavioural economics. You've assumed we all know your objectives and I'm not sure we do. Is there a purpose you have in mind for the money? If they spent it on ... say... parties... would that be fine with you? If all three get 60k, would you say 'you have to use this in a particular way'? Your answer determines if you should ring fence the gift in some way.
B Lettings relief If you ever lived in the house as your main residence then you can claim lettings relief on the gain even though no rent was charged. Since this is a relief worth thousands to you, you should consider the history carefully.
C. Gift into discretionary trust defers gains tax can claim for holdover relief i.e. no gains tax until the property is eventually sold by the trust.
D. Lifetime gift total is? For the record I think you'd have to claim that the no-rent gift you made to your brother year by year was exempt for IHT 'out of normal expenditure'. If you don't do this, you'll have to rethink what your lifetime cumulative total is (in the last seven years) and that will affect your planning.
E. Effect on own IHT Lifetime gifts as you plan changes the computation of IHT on your own death. Maybe you want to go through those numbers and take advice if you have a problem
F. Who owns the house? If you're married, is there reason to say House B was bought jointly (ignoring the title for the moment)

Hope that helps. My guess is that 40k+ of tax is at stake. I think you can reduce that. I think you can be smart about the gift too, in how it is applied to get the best result in human terms.

Firstly, many thanks for a rapid response, very constructive advice, much appreciated.

Secondly, apologies for an incomplete background detail. Thus, please see my current predicament, and answers to your above questions:-
A.
- My niece & nephews are only interested in receiving money.
- In 2003, I bought Property-B as an investment, but due to unforeseeable circumstance (family politic!) it became my brother’s main residence!
- However, I am fully content with my main residence (i.e. Property A), and have no desires/interest in keeping Property B. Henceforth, to fulfil my late brother’s wishes, i.e. to divide the proceeds into equal shares for his children.
- We (family) want his children to get the best possible advice/outcome, however, they (his children) insist on selling the property and receiving money.

B. Unfortunately, I did not live in Property B, it was my brother’s main residence.

Regrettably, I have inadequate knowledge on:
C. ‘Discretionary trust’ – Will need further advice/research!!!
D. ‘Lifetime gift’ – Will need further advice/ research!!!
E. ‘IHT’ – Will need further advice/ research!!!
I have never made any gifts (i.e. cash or property) in my lifetime.

F. I am not married, and SOLELY bought BOTH properties under my name.

Finally, I would be ever so grateful to receive further pointers/documents/websites/etc., to gain a better understanding.

Thank you once again for your input, much appreciated.

Roger.

[iwmtaxadvisor]

Grateful to maths for his contribution. I'm not sure I would say Lettings Relief has been abolished. S223B does say that Lettings relief is still available if one was sharing the house with the tenant - see https://www.legislation.gov.uk/ukpga/1992/12/section/223B. I am still chewing over the meaning of "is" in 2(a) and 2(b)... at the point of sale I guess. One of things for AliRoger to research originally - but now doesn't need to because his later answer says he never lived there.

I forgot to mention Dependent Relative Relief too, if the house was bought before 6 April 1988.

AliRoger - if your brother had a share in equity in the house, these suggestions are not going to be useful. You say "brother's wishes' and 'kid's insist' as though they had a right [Separate point] This last is a classic 'disengager' attitude leading to wealth loss (say the academics). I would be tempted to find one of the kids to manage the property, pay him or her for it, and share out the remaining rent, to encourage them to learn what they have to.

[maths]

I suspected s 223 would not apply (as in most cases it doesn't) and hence when referring to the position pre s223 I referred to "old`' lettings relief.

[AGoodman]

As I haven't seen it written in the other answers:

There is no gift tax (as such) in the UK. If you die, gifts made in the seven years prior to your death are brought into account when calculating your estate for inheritance tax. So:

- if you make a gift to a nephew/niece and survive it by 7 years, it falls out of account. No inheritance/gift tax is payable. Ignore the £3,000 exemption - it's a red herring.
- if you die within 7 years of making gifts, the gifts are counted as part of your estate. The result is that they use up your nil rate band, which you might otherwise use yourself. However, the way it works is that the first £325,000 of gifts are absorbed by yournil rate band and only the excess is taxable on the recipients. The rate of tax they have to pay reduces after three years from 40->32 (yr 4)->24 (yr 5)->16(yr 6)->8 (yr 7)->0 (after 7 years).

If you are otherwise pretty wealthy so would otherwise use your nil rate bands (and that of any spouse if you are married) yourself, the practical effect is to cost you up to 40% tax on the first £325,000 because that nil rate band is no longer available to you. It's a bit of a swizz.

In conclusion, if you are relatively young and in good health, you are probably fine and will not suffer any tax on the gifts. You can also, if you wish:

- take out 7 year term life insurance to cover the risk; and/or
- include a provision in your will that you would like to pay any inheritance tax payable by your nieces/nephews (the default position is that they would have to pay it - albeit it would be a maximum of £50,000 on £450,000 if you have not made any prior gifts).

[AliRoger]

Will further explore & consider points above.

Thank you ALL for a sound advice!

”If cigarette taxes are meant to discourage smoking, wouldn’t income taxes discourage working?” [Unknown].