Capital Gains on Gifted Property?

Should have been a straightforward CG calc on rental property.

Didn't find your answer?

Please coud I have some help with a problem a client has thrown in? I can't get my head around it.

The client is daughter 2 but the problem I have is getting my head around are the transactions before daughter 2 became involved.

Father gifted his home (only residence) to daughter 1 and moved out to rented accomodation in 2009. Daughter 1 and husband lived in a jointly owned smaller property that they bought for £70k in 1998 (only residence). The smaller property was then empty from 2009 and put up for sale for £220k, the idea was that dad would then be given the proceeds. The gifted property then became daughter 1 and husband's main residence. When the sister 1 and husband moved to the large house the smaller property that was put up for sale was transferred into daughter 1's name only. 

Two years pass and smaller house is still up for sale. Daughter 1 doesn't really want the hassel anymore and transfers ownership to daughter 2. Daughter 2 rents the house out to tenents from March 2011 - Feb 2019 when she sells it for £180k following dad's death. All rental income etc has been declared by daughter 2.

No advice was taken before all the "gifting" and changes in ownership took place in 2009 and 2011. No documentation exists for the gifting other than a bill from a solicitor for the gifting between father and daughter 1 in 2009.

I'm probably overthinking this but do I need to worry about possible capital gains for daughter 1 prior to 2011 when my client became the owner of the empy property? I don't have any details for daughter 1 other than a name. 

My second problem is the market value at March 2011 for CGT. How do I calculate that? The value in land registry is shown as less than £100k at the 31st March 2011. Daughter 2 doesn't know how the value was arrived at in land registry as dad dealt with everything her only thought is that is very low. The house was on the market for £220k with an estate agent. The only comperable property around that time frame is one a couple of doors down sold in Dec 2011 for £160k. The client is keen that I use the £220k to reduce the CGT to zero but I think this valuation was vastly inflated. Based on the switching around of properties etc and the driving force behind it (ie) dad who seemed to have the overall control I suspect that the MV had been inflated to avoid capital gains. It is impossible to get answers on valuation because dad dealt with everything.

I would be grateful for your thoughts.

Replies (9)

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By K81
02nd Dec 2019 13:10

well initial thought is that there was potential CG when daughter 1 gifted her smaller property to daughter 2 & there should be a MV from that! presumably that did not happen - the daughters are going to have to get a retrospective valuation from an estate agent.

Thanks (1)
By lesley.barnes
02nd Dec 2019 14:17

Thank you for taking the time to read this lengthy post and replying. That was my thought about the MV and I've already asked the question. There was no valuation done in 2011.

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By whitevanman
02nd Dec 2019 15:30

A suspicious person reading this post might say that daughter 1 bought a property in 1998 for £70k which was sold in Feb 2019 for £180k. It was her PPR for the first 10/11 years but not thereafter. So, in general terms, about 50% (less) of the gain could be taxable. The rest is what they would now have us believe in order to avoid tax (both CGT and tax on rents).
To allay such concerns:
Evidence transfer to daughter 2 in 2011 (really should be in writing);
Why was it transferred? What was the hassle? Again evidence;
Did anyone report the rental income for tax purposes? Evidence who was landlord and who received rents;
Who "sold" the property and whose signature is on sale contract?
You mention a value of £100k with land registry in 2011 but this makes no sense. What was the involvement of LR in 2011? Who provided the value?
The fact that the house may have been marketed in 2009/11 at £220k doesn't evidence value (if indeed that is relevant) because it did not sell. The better value would be from the property that did sell and one would need to evidence why that figure is too low (size of property etc).
Bear in mind that if the property sold for only £180k in 2019, that suggests the value in 2011 was not £220k.
Also, assuming all the story is accurate, using a value of £160k as at 2011 results in a £20k gain. When selling costs etc are taken into account and the Annual Exempt Amount is taken off, is the potential CGT worth the cost involved in trying to prove a higher value? I would doubt it.

Thanks (2)
By lesley.barnes
02nd Dec 2019 16:12

Thanks for your reply. Absolutely agree, I think the puppet-master in the set up was the dad rather than the daughters. Transfer to daughter 2 is recorded at land registry, that is were the value of less than £100k is recorded March 2011. I've already asked the question about were this value came from and Daughter 2 doesn't know. Daughter 2 collected the rents and has declared them to HMRC through a self assessment tax return. Daughter 2 sold the property, she signed the contracts. The hassel with smaller house was dad had daughter 1's husband removed from joint ownership of the property in 2009 and there was a fallout. I think the daughters went along with dad because he had the money. By gifting his home to daughter 1 and renting from a third party he just squeaked under IHT thresholds when he died. All very close to the wind.

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Replying to lesley.barnes:
By whitevanman
02nd Dec 2019 16:24

As you say, close to the wind.
Daughter 1's disposal in 2011 is likely covered by PPR exemption so the only issue is with daughter 2. Her disposal will produce a CG and I am sure you can make her appreciate the difficulty of arguing that the house was worth more than £100k in 2011 when the report to LR says it was less than that. Be that as it may, if the selling price of similar properties is comparable (to the £180k) in 2018/19, it is reasonable to assume the £160k value in 2011 would be more accurate and the likely CG result would be as stated in my earlier post. Have you considered whether it might be possible / appropriate to ask HMRC for a post transaction valuation check? You could put forward the higher figure (£220k) and if a figure of £160k came back you could try to persuade the client that it would be best to accept. Might save the cost of a professional valuer.

Thanks (1)
Replying to whitevanman:
By Wilson Philips
02nd Dec 2019 20:08

whitevanman wrote:

if the selling price of similar properties is comparable (to the £180k) in 2018/19, it is reasonable to assume the £160k value in 2011 would be more accurate

Do you think so? We don’t know where the property is but an increase of only 12.5% over 8 years or so doesn’t sound too plausible.
Thanks (1)
Replying to Wilson Philips:
By whitevanman
02nd Dec 2019 20:45

As you say, it depends where it is (and a lot of other factors). My point is that, if a similar property sold in 2018/19 for a price similar to the £180k achieved by the client in 2019, it is reasonable to assume that, when a similar property was sold in 2011 for £160k, that represented the OMV of similar property and therefore would not be a wholly unreasonable value to put on this property. If HMRC are looking for a value, they will approach the District Valuer who will take a similar approach, though will have access to information on any sales over a period of years and may therefore have better information than we have. Of course the OP could also get more information from zoopla or similar.
If you consider this against the other information we have been given (property marketed, unsuccessfully, 2009 - 2011 at £220k and a value "less than £100k" reported to Land Registry in 2011) it looks positively exacting!
Incidentally, I doubt my house has risen 12.5% in the period since 2011. We don't all live in areas where property rises year on year with a degree of consistency.

Thanks (1)
By lesley.barnes
02nd Dec 2019 17:07

Thanks once more for your time. Its a relief to know that it isn't just me who is suspicious. I am going to ask HMRC to agree the valuation using the CG34. It will throw up a problem of timing for the submission of the self assessment but I only took the client as a favour for one of my longstanding clients.

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By lesley.barnes
30th Dec 2019 15:57

HMRC have refused to do a valuation using the CG34 and sent all the paperwork back on the basis there is insufficient time between the due date of the tax return 31st Jan 2020. I'm going to have to think about this very carefully - given HMRC have already had all the evidence this could potentially turn into an enquiry. The whole thing is a can of worms.

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