Disposal of gifted property - discounted value on half a house ?

Posted by hmyers PM | on Mon, 23/08/2010 - 12:14 760 2 comments | report

The Mail on Sunday carries this question from a reader and the answer:

R.B.writes: I was gifted a half share in a house after my father's death in 1999. This year, ownership of the other half passed to me when my mother died. If I now sell it, would capital gains tax apply and how would it be calculated?
L. K. replies: In simple terms, yes, any gain will be liable to CGT. This is calculated by deducting your 'cost' of the house from the sale proceeds.
Your cost is the value of each half share at the time you received it. This may have already been worked out as part of assessing your parents' estates for inheritance tax.
If no IHT calculations were done, then you will have to establish the open market value at the time of their deaths. You will be allowed to discount the value of the share received from your father by 15 per cent to reflect the fact that there is a limited market for half a property.
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We have a client with similar circumstances : First half Share gifted at £48,000 (Market Value). Second half share gifted (inherited) at £106,750. Disposal of whole property £213,500. How does the 15% discount come in ? Is it 15% of the £48,000 ? What is the gross gain before indexation/taper?

It seems to me that discounting the half share by 15% would INCREASE the gain and not reduce it as implied by L.K.

Thanks

Comments

Reduce cost = increase gain

IanBrewster | Mon, 23/08/2010 - 13:08 | Permalink

It does seem as if this would increase the gain for CGT purposes

The following is in relation to IHT valuation, but it does say that the principles follow through to CGT.

9.7 The level of discount to be applied when valuing an undivided half-share interest should therefore normally be as follows:

a where the other co-owner(s) is (are) not in occupation and the purpose behind the trust no longer exists - 10%

b where the other co-owner(s) is (are) not in occupation but they have a clear right to occupy as their main residence and the purpose behind the trust still exists - 15%

c where the other co-owner(s) is (are) in occupation as their main residence. - 15%

http://www.voa.gov.uk/instructions/chapters/inheritance_tax_ch_1b/pnotes...

Related property

michaelblake | Mon, 23/08/2010 - 21:57 | Permalink

Where both half shares are owned by spouses, or civil partners, the related property rules (IHTA 1984 Section 161) would apply and there would be no discount applied to the half share of the property that your father owned when he died in 1999 (as your mother owned the other half share) but the discount would be applied to your mothers half share when she died (as you owned the other half share then).

Your base cost therefore consists of two parts:

(a) An arithmetic half of the open market value of the property at the date of your father's death, plus

(b) The value of a half share in the property at the date of your mother's death represented by an arithmetic half of the full market value less I would suggest a discount of 10%.

It would be worth asking a chartered surveyor to check the values that you have been given to see whether they are accurate. Any values used for inheritance tax purposes are not binding for capital gains tax purposes unless there was inheritance tax due on the value returned for IHT purposes (TCGA 1992 Section 274). If however the wrong value was filed for IHT purposes and a higher value is used for CGT purposes this could lead to an enquiry on the deceased estate which might lead to a higher additional amount of IHT payable (at 40%) than the CGT saved (at either 18% or 28%).

Michael Blake