Recently widowed and would like to sell a second property and distribute 1/2 of the profit to 5 adult dependants. What is the most tax efficient method for all concerned?

Recently widowed and would like to sell a...

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A recent widow is selling a 2nd home which has been owned for 30 years, but lived in for 12 months.  We are aware of the Capital gain on the sale (exempting the last 36 months and her £10k exemption) but would there will any further tax implications either on her or on the dependants following the distribution of the profits?

I am assuming she will be exempt from inheritance tax?

Much appreciated

Jacqui

Replies (9)

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By pauld
02nd Dec 2011 11:53

IHT

I think once sold and funds distributed to dependents these will be PETS for IHT purposes i.e. will be included in estate if dies within 7 years of gifts.

There are various annual IHT exemptions which you should look and these may be of some use.

Once sold and CGT paid, no further IT or CGT implications.

 

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Replying to paulwakefield1:
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By Jacq_Maud
02nd Dec 2011 14:59

IHT

Hi, thank you for your response, this has pointed me in the right direction.  Would i be correct in thinking that in addition to the PET, there could possibly be an annual exemption of £3k per person? All of this PET and £3k each year would be included in the value of the estate if the widow dies within 7 years?  Additionally, when the widow dies, would the family benefit from both tax free allowances (£325k x 2)?, i.e. the widow and widower.  Also, there would be no IHT if the widower dies after 7 years and the estate is valued at less than £650k?

Sorry for all the questions, but you seem to know more than i do!!

Many Thanks 

Jacqui

 

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By Vaughan Blake
02nd Dec 2011 18:14

Provided the deceased husband did not use any part of his NRB (ie left everything to his widow) then the widow will have a double NRB on her death.

If however she survives seven years from the date of the gift then it will fall out of her estate and thus not use any NRB.

Depending on the numbers it should be possible to escape CGT.

If the widow inherited a half share from the husband then 1/2 of the base cost will be the recent probate value so no gain is likely on 1/2. 

If the property has been let out then there is the extra £40,000 exemption to look at.

If CGT is still a problem consider giving a smaller share to the 5 people pre 5 April 2012 and then get the joint owners to sell post 6 April, thus getting another year's annual exemption.

 

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Replying to Tim Vane:
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By Jacq_Maud
03rd Dec 2011 08:57

1/2 OF BASE COST WILL BE THE RECENT PROBATE VALUE

Hi, we are going to see the solicitor on Monday and will establish the details of the will.

I guess that's the clincher? 

If the property is willed to the widow in full then she will have to pay CGT on the full gain, but only 50% if the deceased has willed his half to the dependants?  I think they did let the property out for some years before moving into it, so there is always the £40k expemtion like you have said.  I forgot about that one.  Also, like you have said, gift the share after sale over two tax years.  Many thanks for the info. 

Much appreciated

Jacqui

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Replying to Tim Vane:
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By campbed
04th Dec 2011 00:29

Unlikely to be lettings relief

Vaughan Blake wrote:

...... If the property has been let out then there is the extra £40,000 exemption to look at.   ...... 

In this case OP says house was main residence for only 1 year out of the ca 30 years owned. Unlikely to have been nominated as main residence for that year. Hence unlikely to be any lettings relief whose value in any case is restricted to the amount of the PP relief  TCGA1992 S223 (4).   Lettings relief generally is restricted to the lowest of :-:::

 

          the amount of private residence relief given by TCGA92/S223 (1) to (3),

or

£40,000,

or

 the amount of the chargeable gain arising by reason of the letting.

See CG manual CG64710  at    http://www.hmrc.gov.uk/manuals/cgmanual/CG64710.htm 

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Replying to JCresswellTax:
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By Jacq_Maud
04th Dec 2011 08:06

The 2nd property was elceted as a main residence in Jan 2011

Hiya, thanks for all the detailed advice.

 

I can confirm that the 2nd property WAS nominated as the main residence in Jan 2011, so i assume the gain will be a the lower of

          the amount of private residence relief given by TCGA92/S223 (1) to (3),

or

£40,000,

or

 the amount of the chargeable gain arising by reason of the letting.

Is this still true, even though the property was not nominated as a main residence prior to letting?

 

Many Thanks

Jacqui

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By campbed
05th Dec 2011 10:05

did husband or widow own property upto his death?

If the property is willed to the widow in full then she will have to pay CGT on the full gain, but only 50% if the deceased has willed his half to the dependants?

No, your statement is not correct if what you wrote is what you meant to write.

If the deceased husband owned the entire property at the time of his death and it is devised under his will to his widow, she will have a base cost of its open market value at time of his death (the probate value). Your earlier posts suggest his estate will likely to be an excepted estate (under £1m gross value, no IHT payable because of spouse exemptions) and so HMRC will accept the executor’s estimate of market value for probate (i.e. will not need to agree or ascertain the value). As property prices are pretty flat currently, then on its subsequent sale then there should be no gain on that probate value. If the intention is to sell the property quickly then the executor could sell it and if the sale price is higher than expected then executor can revise upwards the unascertained value in estate accounts and in executor’s tax return with CG34 and/or assent a 50% beneficial interest to widow prior to sale so as to utilise both the executor’s and widow’s annual exempt amount (AEA) for CGT (=£10,600*2 =£21,200). Hence if husband owned, and widow inherits, entire interest in the property then there should be no CGT payable on near-term disposal.

If property was owned jointly by deceased and surviving spouse, the deceased husband’s 50% interest (if that is correct proportion) is valued at 50% of market value for probate (no discount as co-owner is spouse) but for her  base cost for CGT a discount will apply (usually 10% discount for 50% holding). You say it was owned for 30 years and lived in for 1 year: the widow will only benefit from lettings  (and main residence) relief if the second house was nominated as their main residence. Given the likely history you could expect HMRC to query any claim for main residence/lettings reliefs on the gain on her 50% interest. If the form of joint ownership was as tenants in common rather than as joint tenants with right of survivorship, then if intention is to sell quickly, executor could act in order to utilise his AEA to mitigate effect of 10% discount. If husband’s interest as tenant in common has been bequeathed to beneficiary other than surviving widow then executor could (partly) appoint out that interest to them prior to sale to use their AEA. So there should be no CGT liability on husband’s 50% if owned as tenant in common, only on wife’s interest prior to his death. If property was held as joint tenants, then hopefully wife's AEA will cover gain arising from 10% discount.

So with respect to CGT, if husband owned entire interest then there should be no CGT on near-term disposal. If property was owned jointly, she should have to pay CGT only on her interest (unlikely to be eligible for lettings relief).  

With respect to IHT, transfers to spouse are exempt. So only in the case that husband’s will bequeathed his interest in the property to another beneficiary would any of his nil rate band have been used and so reduce the proportion of his NRB available for transfer to surviving spouse’s estate on her death. Transfers to individuals are PETs. The £3k annual exemption  can be carried back one year. Hence if house sold for £200k net of costs and she owned entire interest then her PET of that amount would be £194k (200-2*3). If widow is expected to live for more than seven years, then one option if husband’s interest did pass to another person might be to execute DoV to change disposition of that interest to surviving spouse (IHTA 1984 s142) who then gifts after sale of property (part of) the proceeds to other person as a PET and the entire transferable NRB of husband would be retained. 

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By Marion Hayes
04th Dec 2011 14:00

Question of fact

PPR and Lettings exemption are intially based upon the facts.

Even if an election had not been made, provided they moved into the house intending to make it their main residence, and treated it as such i.e. electoral role, utilities, council tax, changes of address etc, this would qualify for both PPR (on a time basis), and lettings exempeion as it had 'at some time during the ownership been used as the main residence'.

It is only where the quality of residence could be queried that an election is useful as it can be varied at will.

She will need a valuation as at 31 March 1982 in respect of her half share for the CGT calculation. The Estate agent selling the property should be prepared to give her an informal one free to evaluate the gain.

His half share, as mentioned above, will have been uplifted to probate value whoever is inheriting and the sale proceeds should not be too disimilar given current conditions.  This means that the beneficiaries of the property will not have a tax implication

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Replying to paulwakefield1:
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By campbed
05th Dec 2011 12:29

Jacqui

Jacq_Maud wrote:

I can confirm that the 2nd property WAS nominated as the main residence in Jan 2011, so I assume the gain will be the lower of ………… 

No, it is the relief (from the chargeable gain) and not the gain itself that will be the lower figure.

For example of arithmetic methodology, if gross chargeable gain before reliefs was £100k, relief(s) (PPR and letting) were 20% of gain then net chargeable gain would be £80k. This would be further reduced by annual exempt amount (currently £10.6k) to give £69.4k.

Even though you write that the second house was nominated as main residence in Jan 2011, there are still a number of points in the circumstances that you described which will need to be clarified and discussed with your solicitor (if he is knowledgeable on capital taxes) in order for the surviving spouse to receive specific advice.  These include:

the ownership of the "second" house at the time of husband's death -  presumably it was joint ownership (he and wife owned 50% each beneficially).what happened to former main "primary" residence and, if they retained it, the reasons why, after owning the second house for some 30 years, they elected it as their main residence? Main residence has to be bona fide (honest and in good faith)– i.e. meets sort of tests described by Ms Hayes to include the address where HMRC send correspondence– and nomination can be backdated for up to bona fide 2 years.if widow will be selling main residence where will she be moving to

 

As a general comment (not specific advice) on the circumstances you have described so far, if main residence nomination was agreed then the last 3 years of ownership would be eligible for PPR relief . Thus if house sold in 31 March 2012 the main residence relief would be for 3/30 (30 years since March 1982 base cost) or 10% of the realised chargeable gain. Lettings relief would apply up 3 years if it was cumulatively let for 3 years or longer and otherwise for the cumulatively shorter time that it was actually let for. Of course if periodic letting income was not reported in year received that box may not want to be opened. So indicatively both reliefs taken together might be 20% of gain. Hence if it was a 50% interest, the March 1982 valuation of entire house (if purchased before then) was £50k (10% dicount for wife's 50% interest), capital improvements £30k, sales proceeds (after sales costs) is £280k then gross chargeable gain would be ca. £100k (=50% of {280-50*95%-30}) of which 20% would be relieved to leave 80% or £80k before annual exempt amount. 

      

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