What is the tax position if we buy flats with our mother's money?

David Wesley-Yates
15 August 2016

Q

My brother and I have lasting power of attorney for our 93-year-old mother who lives in a care home and has dementia. We have recently had to sell the family home for £370,000 to fund her care fees. We want to buy two flats to let out in order to generate an income to pay towards her care home.

The problem is capital gains tax (CGT). What is the status of the properties once our mother dies? The house was her principal and primary residence and therefore did not attract CGT, but as she now lives in a care home she no longer has a principal and primary residence. Does the allowance pass to the two new properties?

Also, with regards to inheritance tax (IHT), we know it will have to be paid, but as she is a widow of 32 years is she entitled to any IHT allowance from my father?

From
CA/Lowesoft

A

I’m afraid the law doesn’t provide CGT relief for the flats you are thinking of buying.

As you state, a property has to have been a main residence of the owner at some point in order for it to avoid CGT. As your mother has never lived in the flats, they are classed as investment properties with CGT due when they are sold.

The good news is your mother is entitled to your father’s IHT allowance. Your mother can use any of her husband’s IHT allowance that he did not use. This applies even though he died 32 years ago; you will just need to prove that he didn’t use the relief himself.

 

This could potentially double your mother’s tax-free amount for inheritance tax to £650,000.

However, she won’t qualify for the additional IHT threshold on property as she won’t be passing on her main home when she dies.