In 1988 my client loaned £34,000 to his brother. The brother put this money towards a house which cost £216,000. My client was never on the deeds to the property and had nothing at all to do with the purchase or upkeep. There was a homemade "promissory note" signed by the brother saying when the property was sold the brother would repay my client 34/216th of any increase in value of the house.
In late 2014 the house was sold for much more than the original cost. The brother repaid my client £85,000 so there is a "surplus" of £51,000 over the original loan. My client intends to gift this surplus to his grown up children.
Do the readers think the £51,000 is subject to CGT (as my client has been told by his brother's accountant) or is it a PET by the brother to my client (or perhaps direct to his nephew and niece).
Any views would be appreciated.
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Looks like both
Without any detailed technical analysis, the transaction looks like the acquisition of a beneficial interest in an asset. The gain would therefore appear to be subject to CGT.
The use of the surplus is entirely separate and, as you say, would be a PET. If not doing already, he could drip feed the cash using the various annual IHT exemptions.
both
it is a capital gain for your client (as explained above) AND, if he then gifts the proceeds, this will be a PET by your client to his own grown up children, which will (usually) fall out of cumulation if he survives seven years. Or, he could drip feed the gifts utilising his annual exemptions as helpfully explained above.
Your client's brother has not made a PET, he has entered into a fully commercial transaction (ie borrowing money with the promise to repay it plus actual appreciation in value on sale)
But
It depends on the exact wording of the promissory note.
A loan to his brother, even if more is repaid than originally lent, is not subject to CGT as gains on monies are exempt. Only if it confirms that he is participating in the purchase of the property and is entitled to a share of any gain would it be taxable.
A gift to the nephews/nieces by the brother (ignoring the promissory note entirely) would be a PET and would avoid any potential capital gain.
Does it meet the statutory definition of promissory note? There is no "sum certain in money".
The substance is that the client has acquired beneficial interest in the property.
It would be interesting to know the precise wording of the alleged promissory note.
As a matter of interest where is that statutory definition? I agree that the question is of some interest, but surely academic for the purposes of this question.
S83 Bills of Exchange Act 1882
If this is still in force:
http://www.legislation.gov.uk/ukpga/Vict/45-46/61
Pawncob thinks it might be tax-free and I think it's a chargeable gain so the detail of the "agreement" might be significant.
Section 83 says
A note is not invalid by reason only that it contains also a pledge of collateral security with authority to sell or dispose thereof
So even a "mortgage deed" (such as this?) still qualifies as a promissory note.
Let's look at it another way. If this was a way of making a tax free capital gain wouldn't everyone do it that way all the time?
And what does the legal owner have to say on the matter? Does he agree that the entire gain is taxable on him?
I think
"And what does the legal owner have to say on the matter? Does he agree that the entire gain is taxable on him?"
I read as the property was brother's PPR.
Beneficial interest?
The substance is that the client has acquired beneficial interest in the property
Really? Is the substance not that the brother has made a loan and the amount of the repayment is simply determined by a formula? (I'd be interested to know how much would have been repaid had there been no increase in value).
Any possibility that the 'surplus' may be taxed as interest?
"Homemade" legal documents - aaargh
On a sale of the property to a 3rd party, how can the seller give 34/216th share of the property to his brother? I think you need to take legal advice as to exactly what rights that note conferred. The tax analysis will follow from that.