Ask the Experts: Should we wait seven years to sell the home our mother has gifted to us?

Published by David Wesley-Yates on 15 December 2017.
Last updated on 15 December 2017

Q

My mother gifted her principal residence to my sister and I at the beginning of 2013. We, unfortunately, didn’t have the property valued. My sister and I have been renting this out, but we’re now considering selling. I therefore have a question about capital gains tax (CGT) and inheritance tax (IHT).

We understand that we will be liable for CGT for the increase in value from the time our mother gifted the property to us selling it. How would the increase be calculated if the property wasn’t valued in 2013?

Also, if we sold, paid CGT and later had to pay IHT because of the seven-year rule, could any CGT paid on selling be offset against any future IHT bill? The CGT and IHT seems like a double tax. We would like to sell now, but are wondering whether it might be wiser to wait until seven years has passed. 

From:
EF/Bournemouth

A

You are right that capital gains tax will be due when you sell the property. This will be calculated as the proceeds from the sale less any costs incurred in selling it – such as conveyancing fees and estate agent charges – minus the value of the property when it was transferred to you.

Even though you didn’t have the property valued at the time of transfer, a specialist valuer or estate agent will be able to determine this. You would need to engage them to do this. They are likely to value the property by taking sale prices of similar properties in the local area and making any adjustments they see fit. For example, a similar property to your mother’s may have sold for £250,000, but had a swimming pool and your mother’s didn’t. An appropriate adjustment would be made for the value of a swimming pool.

When HMRC doesn’t agree with your valuation, it will provide its own valuation. It is in your interests to have a high value for the property at the date of transfer. With a high value, the gain will be lowered and the amount of CGT reduced.

If you sold the property, you would be subject to CGT on your share of the property. If your mother were to die within seven years of the gift of the property to you, inheritance tax may become payable at up to 40%. This can be reduced by taper relief. This means that the amount of IHT is reduced on a sliding scale depending on the years between the gift of the house being given and your mother’s death. You could therefore end up paying CGT on the gain on the property and IHT on the transfer to you.

Whether you sell the property now or later doesn’t make any difference to your inheritance tax liability. If you keep the property in your names until your mother dies or sell it before then, the liability of inheritance doesn’t change. The liability is determined by the number of years your mother survives from the date of gift.

David Wesley Yates is a chartered tax adviser at Red & Black AccountancyFind out who our experts are on the Ask the Experts homepage.

TAX RATES

 Capital Gains Tax – 10% to 28%, depending on your income tax band and whether the gain is on a residential property.

Inheritance Tax – 40% on the part of your estate that is above the inheritance tax threshold of £325,000 per person 

This article was written in response to a reader’s question. If you have a financial or work/career question that has left you scratching your head ask our panel of experts who will aim to shine some light on the matter.

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