A client purchased a property in 1990 for £50k. At the time she was a freelance hairdresser, didn't earn a lot and getting the mortgage required was difficult.
Her father gave her the deposit and in order to get the mortgage for the remainder, her sister went on the mortgage and title deeds as joint owner as she earned a decent salary
.
The client has been paying the mortgage and living in the property alone since purchase. The property is now worth £200k
Now, the sister has asked to come off the mortgage/title deeds etc and is not looking for any money in return as at the time she was assisting her sister.
It appears that there will be a CGT charge on the transfer of title or "gift" of nearly £12k on this transfer. (£200-50/2 = £75k - Ann Exemption = £65k)
Is this correct, havin g looked into the matter I can see no other way around.
Thoughts welcomed.
Anon
Related resources
Replies (10)
Please login or register to join the discussion.
Not your worry!
It is your client's sister who is potentially the one with the problem. Your client has not made a disposal. If the sister would rather wait to have a letter from HMRC asking why she has not declared the disposal of an interest in property, and then have to claim the exemption to a more sceptical Inspector after the fact then that is up to her. I would always rather set out my stall first, but in the end it is not your client's or your problem and presumably you actually have no engagement for the sister to be a client.
Further development
I have just heard back from the client having informed them of the fact that they should have no tax liability and the client's sister has said she doesn't want to go through the process of the tax return route.
Does this out her/my client/me in a difficult position? I think it may do as the exemption actually has to be claimed on a return.
Any additional thoughts (and thank you to those who are helping here) would be welcomed.
Pretty much correct, Anon
and on the detail you give, I would believe you can substantiate capital gains exemption applies. I would suggest that the sister notes the detail of the claim to exemption (S.222 or S.225 as seen fit) on the capital gains pages of her appropriate Self Assessment Tax Return in the capital gains pages or extensively in the white spaces. If she does not normally receive a Return then she should request one be issued for the year in question and tell HMRC when she sends it in that she will not need a Return for the following year. In my view it is important to have something on record rather than have a "discovery" attempt based on notification of the title transfer, apart from which S.225 certainly needs to be claimed if that is the route chosen..
an update
to further complicate matters, having informed the client of the potential tax implications;
- actually acquisition date was 1986
- the sister lived there as joint tenant for the first 10 years until 1996 or 7.
This will change things !
Beneficial ownership
What counts for CGT is beneficial ownership. If your client's sister had had her name on the deeds alone and did not in any way pay for the house, arguably she had no beneficial interest and could be disregarded.
The mortgage element may complicate the position - I would suggest your client approaches a solicitor for an opinion as to whether the sister had a beneficial interest in the property or merely held it legally for the client.
In addition, it might also be arguable that. although they were co- owners, the sister's share was never intended to be to the extent of 50%. Even that would attract a discount; obviously if she was only meant to have a nominal share say 5% that would be pretty worthless because of lack of marketability.
Not necessarily
The key issues are the intentions of the parties and what the sister actually contributed eg did she share mortgage repayments for the first 10 years, did they intend to own it jointly albeit maybe not in equal shares, did the sister do any work to the house (this can in some cases create a beneficial or equitable interest in a property).
To Clarify
If the Sister effectively left/gave up her interest in 1996 then that is the point when she gifted her half to my client.
At that time the property would have been worth some £70k so the gain was small but would have been covered by PPR anyway so no CGT due.
Based on that summary, there are no tax liabilities on this transaction as it is merely a paper exercise to tidy up what was intended at the time.
Jane/John If you could confirm my understanding I would be grateful (not as grateful as the client who may have just saved a tax bill!)
Thank you both very much for your input
1996
I think that if the sister had any interest in the property she probably disposed of it in 1996 when she moved out and all that is happening now is that the legal position is being noted properly.
As Jon says, in that case any gain she had would have been covered by PPR.
further details
Thanks for your help on this one so far, it is greatly appreciated.
1. 1986 - 1996 both lived there as joint owners, not as tenants etc, paid mortgage 50-50, bills 50-50
2. Sister got married and was happy to walk away and my client took over full mortgage payments from that day on.
3. No major works were done on the property 1986-1996 yes there would have been minor decor/repairs etc but there was no extensions (client thinks a new kitchen was put in between '86 and '96 but has a memory like a sieve!)
On another note, I am not sure if it affects the issue, on the disposal, there is a gain arising (as per my original post) but "technically" the half of the house is not being gifted it is being purchased by my client (albeit at an undervalue) as she is taking over the mortgage in full and so "paying" her sister the equivalent half of the mortgage outstanding (it has always been interest only so still at original levels)
Thanks in advance for further thoughts
My view
Well, the sister lived in the property so it was her PPR until she left, any way you look at it, barring her owning another property. However, she was doing your client a favour by helping her buy the property and having her name on the mortgage. I take it there was no formal tenancy agreement between them once the sister moved out.
Either your client was anyway the beneficial owner, in which case, the removal of the name from the mortgage deed is a tax nothing, or the arrangement for your client was an implied trust in your client's favour and if so there is an entitlement to the capital gains exemption given by S.225 TCGA 1992. It would have been "unconscionable" for your client's sister to attempt to expel your client anyway.
See HMRC Capital Gains Mainual at CG65420.
Jane's point concerning whether the sister paid for any work done on the house is valid and could muddy the waters.