income tax or cgt?

how would you treat this?

Didn't find your answer?

20 years ago, our client lent his parents £50,000 which was half the price of a house, so they could buy a house (I know!!!  makes you want to weep).  Client's name did not appear on the title deeds etc.

The agreement was that when the house was sold, our client would receive his money back plus half of the increase in value of the property.

Our client has now received £110,000.

Would you treat the £60k as capital gain or interest?

I don't think we can treat it as a gift as there was an agreement.

Thank you

 

Replies (35)

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By Paul Crowley
12th Nov 2020 09:23

Are parents paying tax in full on the gain, or was it PPR

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Replying to Paul Crowley:
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By snickersinatwix
12th Nov 2020 09:32

it was their ppr

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By the_drookit_dug
12th Nov 2020 09:53

I'd have thought no income tax nor CGT payable. It's simply a gift of cash.

Watch IHT though.

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Replying to the_drookit_dug:
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By snickersinatwix
12th Nov 2020 10:03

That is a lovely thought but if there was a binding agreement that they would receive half of the increase in value of the house it does not sound like a gift to me.

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Replying to snickersinatwix:
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By the_drookit_dug
12th Nov 2020 11:36

Sorry, I hadn't appreciated that the agreement was a formal agreement.

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By PandoraSleeps
12th Nov 2020 10:15

I would lean towards CGT if there was a binding legal agreement as this would give the right to sue (chose in action)?

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Replying to PandoraSleeps:
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By snickersinatwix
12th Nov 2020 10:29

Thank you
If you went down this route, would you report it as his % of the sale of the house on our client's return? His name was not on the deeds and my understanding was that ownership of land must be in writing.

or just a chose in action?

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Replying to snickersinatwix:
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By PandoraSleeps
12th Nov 2020 10:53

Not sure but I would be putting lots of white space disclosure about it! Subsequent poster has a good point about that tax case though which is worth reading.

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By richard thomas
12th Nov 2020 10:24

It's interest, or possibly miscellaneous income. See Wilson v Mannooch 21 Tax Case 178.

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By The Dullard
12th Nov 2020 11:15

I'm going to go with CGT, but with PPR.

The affect of the agreement is to give the son an equitable interest in the property, in relation to which he then appears to have settled an interest in possession on the parents.

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By paul.benny
12th Nov 2020 11:21

Was there a written agreement - or was it just an informal understanding? With nothing in writing, you have more latitude in interpretation - for example treating 'loan' and 'repayment' as being gifts.

Is there any prospect of parents seeking funding for social care in the next few years? Parting with half the sale proceeds might adversely affect such a claim.

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By Wanderer
12th Nov 2020 11:29

I'm going miscellaneous income, even if nothing in writing:-
https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim100225

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By Tax Dragon
12th Nov 2020 12:19

You know when you've been Mannooched.

paul.benny wrote:

With nothing in writing, you have more latitude in interpretation.

The reverse may be the case. If nothing is documented, you are straight into Mannooch - income. The Dullard's more creative suggestion relies, I suggest, on there being documentation. It also relies on that documentation saying helpful things.

But I think the real point is that up front planning (supported by good documentation) could have had a zero tax outcome. (We are not told enough to know whether that happened.) With no planning, and without supporting documentation, it's income.

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Replying to Tax Dragon:
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By The Dullard
12th Nov 2020 12:31

Why does there need to be documentation?

The whole point of an equitable interest is that it is not an interest that exists or is enforceable unless a court says so; but it doesn't mean it isn't there until that time.

And an agreement most certainly exists if all the parties agree that there is an agreement and agree on what the agreement is; whether or not it's in writing.

And there's no need for a trust to be in writing either.

Now possibly, people wanting things to be in writing are referring to section 53(1) of the 1925 Law of Property Act. They need to read section 53(2).

TSEM9610 will also help, I suspect.

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Replying to The Dullard:
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By Tax Dragon
12th Nov 2020 12:31

Where were you when Mannooch needed you?

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Replying to Tax Dragon:
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By The Dullard
12th Nov 2020 12:33

Mannooch was only entitled to a capped amount. My understanding is that the OP's clients' son had an effective 50% interest in the property by virtue of the agreement the existence and terms of which do not seem to be disputed by the parties to that agreement.

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Replying to The Dullard:
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By Tax Dragon
12th Nov 2020 12:33

The Dullard wrote:

The whole point of an equitable interest is that it is not an interest that exists or is enforceable unless a court says so.

Can you reword this please. It makes no sense. To me.

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Replying to Tax Dragon:
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By The Dullard
12th Nov 2020 12:35

Do you have access to google? Type "equitable interest".

This explains it quite well:
https://www.inbrief.co.uk/land-law/legal-and-equitable-interests/

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Replying to The Dullard:
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By Tax Dragon
12th Nov 2020 12:59

Whatever the merits of what you are saying, my point is valid: planning and documentation, no tax; no planning or documentation, possibly have to go to court to establish the position or (probably cheaper) pay tax.

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Replying to Tax Dragon:
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By The Dullard
12th Nov 2020 13:30

I don't disagree.

In this instance why is there a need to go to court? On the facts stated by the OP I'd say that there was a very good case for there not being any tax due. I'm sure the OP would have told us if the parents were occupying the son's half of the house under a lease.

My arguments just come from the same place that HMRC's successful arguments came from in Bingham:
https://www.bailii.org/uk/cases/UKFTT/TC/2013/TC02528.html

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Replying to The Dullard:
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By Tax Dragon
12th Nov 2020 15:30

The Dullard wrote:

In this instance why is there a need to go to court?

Please stop doing that - converting events that I say are possible to outcomes that you say I say are certain. It's a helluva stretch to get from Bingham being taxed on interest earned on money he'd put into an account with his name on to deciding that an equitable interest in property was acquired and immediately settled in the instant case. You might run the argument, but you'd wish you had the paperwork when standing in front of the Tribunal. (Now you can say I've said that.)

Wait... is there paperwork? Have we even been told yet?

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Replying to Tax Dragon:
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By The Dullard
12th Nov 2020 15:39

Well, actually I have also already referred to where it says it in HMRC's manuals. The paperwork is in the transfer of funds. You can also use witnesses at tribunal too, which works quite well when all the parties are singing from the same hymn sheet, as appears to be the case here.

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Replying to The Dullard:
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By Tax Dragon
12th Nov 2020 15:50

My comment re paperwork is to the OP.

Of course, if there is some, it could cut both ways, depending on whether it arose from informed and well-executed planning or uninformed DIY.

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Replying to The Dullard:
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By richard thomas
12th Nov 2020 16:13

If this situation is to be one where the tax is CGT and with PRR, and I had been hearing the case my first question would have been where I could find the terms of the settlement (s 225 TCGA). If it is not in writing then personal testimony of witnesses is essential. Someone in the family must have told the OP that it was a loan and that the payment of 50% of the proceeds was repayment of the loan with an uplift which might be interest or a discount or something else - or why the question to this forum? Evidence from the person who told the OP that might be interesting, and put the OP in a difficult position if it was not what they were told.

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Replying to richard thomas:
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By richard thomas
12th Nov 2020 16:42

And if I was HMRC faced with the trust explanation I might be interested to know if Mum & Dad had returned any POAT income in the 20 years.

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Replying to richard thomas:
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By Tax Dragon
12th Nov 2020 16:57

Is POAT in point? (Sorry, I mean would it be in point, in that scenario? I'm not seeing it.)

If I was HMRC, I think I'd put forward the case that the reference to half the increase in value of the house was simply a mechanism for calculating interest.

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Replying to richard thomas:
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By The Dullard
12th Nov 2020 16:58

You seem to be suggesting that mum and dad owned the son's half of the house before he bought it for them?

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Replying to richard thomas:
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By The Dullard
12th Nov 2020 16:56

Would you really not be willing to draw any inference from the conduct of the parties over a period of twenty years?

Hurdle 1 is obviously CGT, and the nature of the "agreement". Since the parties appear to be honouring it, I assume that they agree on some key provisions, that the amount to be paid to the son is 50% of the sale proceeds (the 50% cost originally advanced, plus 50% of the increase in value). The OP seems to be suggesting that nobody has put a name on the uplift, but its effect is to entitle the son to a half-share in the sale. That's a lot for an informal loan that's just a loan don't you think? What would have happened under the "agreement" if the parents had sold a few years later at a loss one wonder.

One also wonders whether HMRC just made up the content at TSEM9600 on, or whether they had the benefit of legal advice. Perhaps even counsel's opinion. If the "agreement" doesn't say it's a loan equity assumes the opposite according to HMRC (hopefully with the benefit of legal advice).

If one gets you to accept the dizzy prospect that the son owns half the house that his parents have lived in, without interference, rent-free for the last 20 years without lease or licence (unless its mentioned in "the agreement"), then you want to grill them about whether or not they were entitled to do so under the terms of the settlement. Again, the "agreement" might help.

Most of the folk on the site are in the business of advising clients in exchange for payment and all seem to be rushing to a consensus that the would give the worst possible outcome for the client. My point is a simple one. Not so fast!

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Replying to The Dullard:
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By Tax Dragon
12th Nov 2020 17:11

The Dullard wrote:

What would have happened under the "agreement" if the parents had sold a few years later at a loss one wonder.

Then the increase is £Nil, half of the increase is £Nil and the lender gets his capital back. That's why the document is worded that way.

I like the "not so fast" approach, but I would not ask the client to incur fees unless I thought the case I was putting forward was correct. (I'm not a defence counsel!)

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Replying to Tax Dragon:
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By The Dullard
12th Nov 2020 17:27

But presumably you'd have taken the trouble to properly investigate the "agreement" to find out what the terms (whether it was actually expressed in that way) were before you just jumped in and decided that your client should pay income tax (most certainly much of it at a marginal rate of 45%) on it?

When was this "agreement" reduced to writing? It wasn't earlier.

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Replying to The Dullard:
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By Tax Dragon
12th Nov 2020 17:36

I've belatedly realised that the OP was quoting a document.

But yes, if what you meant by "not so fast" was "let's determine the facts before we decide", then you have in three words summarised my biggest single gripe with this whole forum. Yes, Anon is annoying. But I can ignore Anon. The comment which has most annoyed me this week was not from Anon and read "I would vote for this as best workable solution" in a thread in which most of the tax issues had not even been identified, far less "solved".

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By Anonymous.
12th Nov 2020 13:26

There have been very similar questions in the past - and one in the past few months. Haven't got time to look now but the OP might want to have a look.

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By Anonymous.
12th Nov 2020 15:58

What was the solicitor and mortgage lender (if any) told? That might shed some light on the elusive facts!

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Red Leader
By Red Leader
12th Nov 2020 17:10

Crikey, a thread like the old days. Well done.

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