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CGT - update

Not my bag - please help (changed after PNL's slating)

Parents purchase BTL property for £103k in 2005, no mortgage. Gift it to (adult) child in 2012 (MV=c£115k). Child already home owner. Child wants to sell it to raise capital for their new business in 2016. Parents say 'Don't do that, here's the cash you need instead". Property title deeds remain in child's name but they all consider it to be back with the parents (in clients words "so, technically, the house was theirs again"!). Parents retain their own home from pre-2005 to current day.

Roll forwards to 2018, parents want to sell and find a buyer @ £121k. Child (my client) is a BR taxpayer.

Question from client: Should I a) sell it to my parents & let them deal with it all or b) sell it to the 3rd party then transfer the money to my parents?

My thoughts (well, ones that can be communicated to the client):

a) sell to parents:

i. Parents would incur 3% SDLT charge.

ii. Sale should be at £nil to avoid CGT for my client

iii. Parents would have capital gain of £121k

b) sell directly to 3rd party:

i. Can they use the £103k tax base from their parents' original purchase?

ii. CGT on £7k (£121k-£103k less £11k threshold) at 18%

iii. Gift of property remains on the IHT 7 year timeline.

(Let's ignore anything to do with rental income for now - from the lack of tax returns I can only presume that the property has been empty all of these years.)

1. Am I right with point Bi?

2. Is there anything else that I'm missing?

 

Thanks all.

*** UPDATE****

New email from client (daughter) "What I didn't realise is that we signed a declaration of trust when they transferred the property to my name, which names my father as the beneficial owner throughout. So it appears that its not an issue after all."

 

Replies

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By Ruddles
23rd Feb 2018 16:03

Ignoring the likelihood of Justin jumping in and wittering on about constructive trusts etc:

a)(ii) - why do you think that a 'sale' for £nil would avoid a CGT charge?

b)(i) - if you consider a)(ii), you might be able to answer this one yourself. I am assuming that s165 was not considered in 2012.

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to Ruddles
23rd Feb 2018 16:07

S. 165 on a BTL? Really? Is it agricultural property?

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By Ruddles
to Portia Nina Levin
23rd Feb 2018 16:18

Brain-fart - getting myself confused by the numbers 2 and 5

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23rd Feb 2018 16:12

@Op You don't sound at all knowledgeable. That's the something that's missing!

The answer is B and the gain is £6K.

What I think you'll find happened was that the parents gifted the property (deemed at MV), then made a cash loan, and now the son is selling the property and repaying the cash loan from the proceeds.

If you ask them in a particular way, you'll probably find that they will come up with some exchange of letters between them over the years to document that course of events.

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to Portia Nina Levin
23rd Feb 2018 16:27

Thanks PNL.

I knew someone would find me out one day. Probably should have described the thread “CGT - not my bag. HELP”.

Much appreciated.

Irrelevant, but it’s the daughter not the son. That was a naughty assumption.

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23rd Feb 2018 18:10

Doh. It hasnt loaded properly and didnt see PNL's answer.

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23rd Feb 2018 19:59

The sting in the tail might be that if the parents want £121k and the loan was say £117k, then that £4k profit is taxable as interest.

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to Tax Dragon
23rd Feb 2018 21:25

Could it not be a case of repaying the eg £117k. Full stop. New transaction - gift/loan £4K to parents?

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By Ruddles
to atleastisoundknowledgable...
23rd Feb 2018 22:29

But if the parents “want” the £4k it’s hardly a gift, is it?

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to Ruddles
23rd Feb 2018 23:03

But at least it’s not taxable, unlike if it was paid as interest? (Australian inquisition).
Hence the “Full stop. New transaction”.

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By Ruddles
to atleastisoundknowledgable...
23rd Feb 2018 23:10

You missed my point - if it’s not a gift, or loan, what is it?

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to Ruddles
23rd Feb 2018 23:16

Sorry, still missing your point.

@TaxDragon said the £4K would be taxable as [deemed] interest. I’d already pre-empted that issue in my mind by treating it as a separate, unrelated, transaction.

What are you saying?

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By Ruddles
to atleastisoundknowledgable...
23rd Feb 2018 23:19

I’m asking you what the payment would be if not interest. If the parents want the cash then it can’t be a gift and similarly unlikely to be a loan.

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to Ruddles
24th Feb 2018 09:39

She is probably going to repay the 117k and then, after a couple of days contemplation, will probably decide that, say thank you for being good parents, she feels generous and that a gift would be a nice thing to do.

Together with a nice thank you letter, the job should be done :-)

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to Manchester_man
24th Feb 2018 10:00

My point is that as an advisor you can never suggest that. If you do, you should hang your head in shame. And recognise that the reason that more and more anti-avoidance - drawn so widely that many legitimate (you know what I mean) activities are within scope - is precisely because this kind of feeble relabelling ("it's not interest, guv, it's a gift, honest") is what passes for tax advice in the minds of too many accountants.

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to Tax Dragon
24th Feb 2018 10:06

I’m a fan.

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to atleastisoundknowledgable...
24th Feb 2018 09:54

atleastisoundknowledgable... wrote:

I’d already pre-empted that issue in my mind by treating it as a separate, unrelated, transaction.


atleastisoundknowledgable... wrote:

Treating it.


It's not though. You might have convinced yourself of the power of your mind to override the facts. But the fact is that your tax 'planning' is little more than simple evasion.

Think I'm being harsh? Are you an advisor? Have a go at drafting the advice letter. Wait a day. Read what you wrote. See what you think then.

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to Tax Dragon
24th Feb 2018 10:27

This is never something that I would put in an advisory letter, or any written form for that matter.

What’s more likely is that I would state the rules in an email (assume only £117k repaid, no gain on loan, no interest taxable - just worded better), then have a conversation, not telling her what to do but rather lead her down the garden path. Up to her if she drinks the water. (And yes I know I’m mixing sayings).

I do get your point, but (@Manchester_man) I’m clearly not the only one who would go down this route.

The client pays my bills not HMRC. There was no intention for there to be loan interest in this (global) transaction. Fair enough that you could argue / would concede that (taken as a whole), the parents would have had a capital gain of £121k-£103k =£18k. Owned jointly, so below the threshold, so no tax liability. I agree that technically this isn’t what has happened, but in practical/intended terms ...

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to atleastisoundknowledgable...
25th Feb 2018 13:24

atleastisoundknowledgable... wrote:

This is never something that I would put in an advisory letter, or any written form for that matter.

I’m curious. You appear to be saying that professional advice to evade tax is Ok so long as that advice is only given verbally. If you don’t mean that you might want to clarify.

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to andy.partridge
26th Feb 2018 08:28

To clarify, I’m not saying that giving professional advice to evade tax is ok.

What I’m saying is that if I state the rules to my client, describing any assumptions that I’m making then they tell provide evidence of a particular transactional history, I am going to treat that as read.

You may say it’s wrong, I say it’s a fine line that I make sure I stay on the right side of.

My clients put the roof over my family’s head, not HMRC.

Others in this thread seem to agree with this position- a straw poll on AW would I’m sure show that I’m far from the only one with this mindset.

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24th Feb 2018 09:40

Duplicate

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24th Feb 2018 10:44

See post by Portia Nina Levin 23rd Feb 2018 16:12 .
Whatever they want to think happened, it didn't. Should the parents need any extra money the child can lend it to them - documented this time -why increase their estate unnecessarily - and can if they wish fund this loan by selling the BTL. CGT 6k less costs of sale

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24th Feb 2018 11:59

p.s. would also be wondering what they wanted cash for? Real danger of POAT maybe?

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to Marion Hayes
25th Feb 2018 12:11

POAT might be prevented if s103 FA 1986 applied.

But now we're getting technical and the OP doesn't want to give advice in writing.

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28th Feb 2018 12:44

New email from client (daughter) "What I didn't realise is that we signed a declaration of trust when they transferred the property to my name, which names my father as the beneficial owner throughout. So it appears that its not an issue after all."

The "signed a declaration of trust" presumably contradicts the "transferred the property to my name"?

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to atleastisoundknowledgable...
06th Mar 2018 07:55

atleastisoundknowledgable... wrote:

The "signed a declaration of trust" presumably contradicts the "transferred the property to my name"?


But if that's what happened, that's what happened. Would I be wide of the mark if I supposed that your client (the daughter) has in the meantime been declaring the income? Of course it was incorrect to do so, if it was not hers to declare.
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to Tax Dragon
06th Mar 2018 10:37

Well I’m sure it was well thought out of her not to declare any rental income.

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