I have a client who has been living in a house for over 10 years. The house and mortgage was in his mothers name however the mortgage payment came out of his bank account. Now the mortgage has been paid off they want the title of the property to transfer to the client. What would if any the capital gains implication be to the client?
Many thanks :)
Replies (22)
Please login or register to join the discussion.
Market value rule will apply to mother's disposal and she will have a capital gain accordingly, subject to any exemptions she might be entitled to. Has she ever lived in the house herself?
Yes client will have potential CGT liability on a future sale (his base cost will be value at date of transfer from mother) but gain attributable to periods when he lives in it will be exempt.
Hang on
Did the mother have a beneficial interest? After all, the son paid off the mortgage.
Who paid the deposit on the property?
Who will keep the proceeds when it is sold?
Deemed transfer of market value
Which involves a change of ownership. Which between related parties is deemed a transfer at market value. Which is a sale for the purposes of CGT. They arent selling the property, just putting the title in to the sons name.
I agree the answer is different if the mother was holding the house on trust for the son - but nothing in the facts suggests that. Mortgage payments look like rent.
Sounds like a bare trust to me!
Thats right it wasnt held in trust for the son. I believe it was done this way just so the son could buy the house but I would assume he was refused a mortgage himself therefore got his mum to do it. The mortgage payments would probably technically be rent payments.
Would there be a way to spread the capital gain (For the mother) over say 2 years by giving the son 50% share of the house now then the remainder 50% in a couple of years.
Many thanks for your help everyone on this one. I just havn't come up against this scenario before.
Trust
The son paid the deposit and if the property is ever sold the son would keep the proceeds.
This was the intention from day one when the property was first purchased.
Then there was clearly a trust, and the transfer of legal title is a non-event for CGT purposes.
The son's CGT base cost is the original cost of purchase by the mother.
Changing the legal title, of itself, has no tax implications.
There will only be a tax liability, if the mother is disposing of a beneficial interest.
It will need to be established whether the mother was merely a mortgage facilitator or owner/part owner.
Proving a negative
True, but legal title and beneficial interest tend to go hand in hand. Therefore dismissing this as "just a change of title" (what I objected to earlier, though not what you are saying in this post) is wrong. There will only be a tax liability, if the mother is disposing of a beneficial interest.
The problem is in disproving the mother having beneficial interest. I don't think that payment of the mortgage is enough, as this could not unreasonably be considered rental payments. The mortgage was also in the mother's name after all, so the son is discharging her legal liability not his. Has this "rent" been accounted for on a tax return? If an interest only mortgage this may not be an issue (expenses and income matching giving nil taxable income) but may be something HMRC take an interest in. Is there any evidence that the beneficial interest vested in the son?
I think the OP knows that a transfer of legal title (assuming it is also a transfer of beneficial interest) is a sale for CGT purposes. I assume his remark that they were not selling, just putting title in son's name, was a response to the request above as to who would keep the proceeds when the property is sold. Understandable that he should respond to the extent that there are no plans to sell it in that sense.
What were the intentions of the parties (mother and son) when the property was purchased? Did these intentions change subsequently?
Without further information, it is not possible to state what are the tax implications.
Take notice of KingMaker, dropout guy and Portia!
Legal ownership and beneficial ownership do not necessarily go hand-in-hand. You need to establish who had beneficial ownership. You need to consider the intentions of the parties at the time the house was acquired. If, for example, it was intended that he should incur the cost of it and would benefit from any future sales proceeds, then he has had beneficial ownership since the house was acquired and as CGT is only concerned with beneficial ownership, the transfer legal ownership is a non-event.
As Portia says Mother may have been merely a bare trustee for son by acting as a 'quasi guarantor' for the mortgage.
If not already done, I recommend committing the above to writing to establish the position between the two parties.
I agree
There is apparently a trust, you will need evidence if HMRC start asking questions, and evidence created before they start asking question will carry more weight.
If the mortgage payments are deemed to be rent - is there not an issue whereby there are undisclosed taxable profits for 10 years?
@bananaMan
No, I think it has been agreed that Son was always the beneficial owner, therefore the mortgage payments he made cannot be regarded as rent - Mother had no beneficial interest in the property.
Having
No, I think it has been agreed that Son was always the beneficial owner, therefore the mortgage payments he made cannot be regarded as rent - Mother had no beneficial interest in the property.
Having read back, I agree that is the case
I will rephrase my question - "would there be an issue whereby there are undisclosed taxable profits for 10 years?"