Capital Gains Tax on an inherited property

[Kracken]

Hi, am posting this in property too. Would really appreciate some advice on this, I have looked at the HMRC site but no wiser!

So, my husband inherited a house a couple of years ago. When he inherited it was valued for probate purposes at £600K. The house was a bit of a mess (it hadn't been decorated for about 30 years, the top floor had been shut up for about 10 years, no central heating, very dodgy electrics etc) and at that point we weren't in a position to borrow any money so we didn't do anything with it apart from clearing it out. We didn't really want to sell it at that point.

This year we were able to increase our mortgage on our home a bit to allow us to renovate the inherited house. Once it is renovated, based on recent sales of houses round here, it is likely to be worth about £900K (crazy London prices).

I understand that capital gains is paid on profit when you sell, i.e. how much a property has risen in value. But, my husband didn't pay for it he inherited it. Does this mean he would have to pay capital gains (28% I think) on £900K or would it be on £300K which is roughly how much I think the value will have increased by.

Thanks!

[YoucancallmeQueenBee]

You pay capital gains tax on the difference between the value when you received it (regardless of how that happened) and the value when you sell it. Don't forget that there is an individual allowance on CGT of £10.6k and then it is 18% or 28% (depending on your tax rate) on any amount thereafter.

So basically the answer to your question is yes!

[Talkinpeace]

cgt is on the profit after selling fees and personal allowance

[maillotjaune]

Your cost is the probate value - that value was subject to inheritance tax so only the subsequent rise in value attracts CGT.

[Shakey1500]

I might be wrong but I'm inclined to think you would pay CGT on the value of when you inherited the property. I.E not including any market value increases OR the amount you will have spent, out of your own pocket, in improving it?

I'm not an expert whatsoever.

[Leopoldina]

remember you can carry forward your unused annual allowance for a couple / few years too, & I think the costs of doing it up may be taken into account.

[Talkinpeace]

shakey no, CGT not on value but on GAIN at sale
leopold carrying forward unused CGT allowances : I'd like to see the HMRC link for that one.

[Peetle]

You could live in it for (I think) two years as your primary residence. Then you can sell it with no CGT and move back to your current house.

[Leopoldina]

ah sorry, it's losses you can carry forward not the annual exempt amount.

[YoucancallmeQueenBee]

Leogpoldina as far as I know, you can only carry forward a capital gains allowance, if you have reported a capital loss in your tax return. Sounds unlikely to work in this scenario.

[titchy]

Agree with others - you'd pay CGT on £300k minus costs (don't forget to include interest on the extra loan you borrowed as a cost, estate agent fees etc) minus the CGT allowance.

[Kracken]

Many thanks everyone! That is really helpful and it sounds like we'd only be taxed on the increase in value which is really good news.

Interesting that we could live there for a bit and then move, sell and perhaps not pay CGT - my husband is very excited by that! A poster on the other thread I started on this has suggested getting some professional advice on the tax aspect (not that I don't completely trust you wise mumsnetters!) which sounds sensible so I think we'll do that.

Thanks again!

[Flibbertyjibbet]

When you sell your house you have to state whether it is your main residence. Now at the moment your current house is your main residence so you are selling that. BUT when a sale happens without a 'related purchase' then it may flag up to HMRC that you have another property.

In some cases conveyancing solicitors have to inform HMRC or other authorities of things that they suspect house sellers/buyers are up to so this might fall under that category.

But you say he inherited the house 'a couple of years ago'. There is a time frame of maybe 2-3 years that you are allowed to have another house, and be doing it up or something, before you move into it and in that case would not matter if you are selling your own home and not having a 'related purchase'.

Sorry its a long time since I passed the conveyancing exam, so am very woolly. ANd possibly out of date.

Its high value property - don't listen to us Ring a solicitors that has a conveyancing dept and tell them you are thinking of selling your own home to move into a house your dh inherited x years ago and ask what the implications are for CGT.

[Shakey1500]

Thanks talkinpeace

[Collaborate]

I'd speak to an accountant if I were you rather than a solicitor.
You should also think about putting the property now in to your joint names. That way, when you sell you make use of 2 personal allowances and your own marginal rate of tax if you are a lower rate taxpayer.

[maillotjaune]

This house has not been your main residence so the exemption will not be available. There are all kinds of subtleties in that legislation but generally the house needs to have been your home at some time and obviously this hasn't.

[bachsingingmum]

There are some errors in the posts above. Yes, you can deduct the probate value of the property and also probably most or all of the improvement expenditure. Keep receipts. What you've done needs to be "reflected in the state or nature of the property" at the time of sale. Then you can deduct selling costs (estate agents, solicitors etc). You can't deduct interest. Good advice about transferring into joint names.

As to moving in and claiming principal private residence relief - yes that might work if it truly becomes a residence of yours and you are not residing there for a temporary purpose. I would recommend getting advice from a tax accountant as there have been about a dozen tax cases through the courts in the last couple of years on this point. All but one have been won by HMRC, so you need to get this right or not bother.

Also, beware any profit being treated as income. If you've spent money developing it for the purpose of of realising a gain then this might apply.