Will I have to pay capital gains tax if my mother gifts properties to me?

11 July 2016

Q

My parents jointly owned three holiday cottages worth about £750,000 in total. They bought them for around £30,000 in the 1970s.

My father recently died and left his half of the cottages to my mother. If she now gifts the cottages to me, is there any capital gains tax (CGT) due now or if I subsequently sell the cottages?

From
SK/Hayling

A

There is no capital gains tax on death, so your mother would have inherited the full value of your father’s share. The value of your father’s share for CGT purposes if your mother gives you the cottages would therefore be the value of half the cottages at the time when your father died.

If your mother gives the cottages to you, she would be liable for CGT. The capital gain on your mother’s half would be the increase in value from initial purchase, while on the inherited half you would be liable for CGT on any increase from the date of your father’s death.

Your mother could offset any buying and selling costs against this, plus the cost of any improvements (though not routine maintenance). She would also have her capital gains allowance for this tax year of £11,000 to reduce the taxable gain.

 

If your mother’s income is below the higher-rate tax threshold, part of that gain would be taxed at 18% rather than 28%, so that could bring the bill down.

Don’t forget there would be inheritance tax implications as well should your mother die within seven years of giving the properties to you.

You would also face a separate capital gains tax bill when you sell the cottages calculated on the difference between the value of the cottages when your mother gave you them and the value when you sell.

 

What is Capital Gains Tax?

Capital Gains Tax (CGT) is levied on profits you make from selling an asset that has increased in value. You are taxed on the gain, not the overall value of the item. For example, if you buy an asset for £100,000 then sell it later for £120,000 you could be taxed on the £20,000 gain.

CGT is levied at 28% for higher- or additional-rate taxpayers on gains from residential property and 20% on gains from other assets. For basic-rate income taxpayers it is a lot more complicated: the amount you pay depends on the size of the gain, your allowance and your taxable income. It will be between 10% and 28%.

 

You pay CGT on gains made when you sell most personal possessions worth more than £6,000. The exceptions include assets held within an individual savings account (Isa), your car, your main home, UK government gilts, and premium bonds.

Everyone has an annual CGT allowance of £11,000. You can sell assets and make up to £11,100 per tax year before CGT has to be paid.