cqpital gains tax on property lived in by relative rentfree

[Keenwa]

I hope somebody might know something about this. I could really do with a bit of guidance.

A few years ago my elderly parents bought a small house for a younger family member and her children, as she was about to be made homeless. My parents are pretty well off although they don't think so She has many problems and has suffered abuse. She claims benefits, but not housing benefits as this would be against the rules (would be considered 'contrived tenancy'). So they get no rent from her and receive no financial benefit from her living there, apart from the rise in value of the house.

For many reasons which I won't go into here, she urgently needs to move to a different area. I asked my parents to help with this by selling the property and buying another of the same value in the other area. Unfortunately parents have been advised by a friend that to do this would mean a huge capital gains tax bill , as the current property has increased in value by £50k. Plus stamp duty at a higher rate on the new property as it is not their own residence. Plus estate agent fees for selling the current property (around £2K) Plus legal fees around the same. Therefore they think that by doing this it would cost them £30k to £40k. So they won't do it. Is this really true when they are not making any profit from the situation?

My young relative's situation is pretty bad and it is affecting the children's health and welfare. Can anyone tell me if this is true about the amount it would cost them and is there any way around this?

A few days previously they had said (their own suggestion, not coming from me at all) that they would put the property into my name, to help me avoid inheritance tax when they die. If they'd have done this I would have happily arranged changing the property for her. Then they decided, no they weren't doing that as it wouldn't affect inheritance tax after all. That was the reason they gave. But I currently don't own a property myself (although we could afford it), we're temporarily renting. So wouldn't that solve the problem or would capital gains be due if they gifted it to me? Or directly to the young relative in question?

What is the best way forward as this is not going to be a temporary problem for her?

Any ideas?

I am asking on here because I don't know who I should ask, tax lawyer , accountant or who?

The rate of cgt will depend on whether they are basic or higher rate tax payers and if basic rate how much basic rate band is available. Will either be 18% or 28%

We've just agreed a sale on a second property. You can deduct any purchase fees including stamp duty and solicitors costs. For the sale element you can deduct estate agents fees & solicitor costs. You can also deduct the cost of any major improvements made to the property. The tax is charged on the remaining gain.

Is it possible that the whole thing would be cost neutral for your parents? As in, the "profit" in value would be taken up by capital gains + stamp duty + costs.

It could be that as it has been a few years, your relation might have to consider independence.

You say she urgently needs to move to a different area. If this is perhaps because of an abusive ex making a nuisance of himself (I don't recognise you here - I'm just guessing), then what is to stop this situation arising again in a year or two? Will your parents sell house number 2 and buy house number 3 for her? How long does she hope for this situation to continue and when do you think she intends returning to work, because it doesn't sound like she can afford to be a stay at home mother long term if she is single, on benefits and living in a free house?

I don't know the ins and outs of the situation, or how much your parents can afford to spend on this set-up, but the figures as you describe them appear to be correct (have recently been through something similar, and had professional advice).

Btw, it WILL affect inheritance tax. They should have put the house in your name when they said they would. The longer they leave it, i.e. if they then die within seven years of putting it in your name, the more tax you have to pay. With inheritance tax planning, you can't just talk about it, you actually have to DO it. Again, I have recently been through this, and it took a looming serious operation for my parent to actually realise that talking endlessly about it for the last 15 years isn't quite the same as going to a solicitor and making the arrangements.

As a temporary measure, what is your parents' tax band? Could they rent out the house (and pay tax on that rent) and give your relation the difference for the next year or two to help her get on her own two feet in a rented property in this area she so urgently has to move to?

Also if the housse goes in your name and you would no longer be classed as a first time buyer and would effect the stamp duty you paid.

CGT would be applicable on a second property as would stamp duty if bought in their name

Others have said the same thing, but to reiterate, I would be surprised if much CGT was due
They can use their 12.5k allowance (presumably x2 if the both own), plus any costs from buying eg solicitors, plus any improvements made (difficult area as repairs don't count), then the rate to pay tax on is 18% for basic rate taxpayers. So maybe 3-4k due in total?
It may be worth re-exploring the idea of renting the property to the relative as they may have misunderstood the rules. I know parents who rent to disabled adult children.

Thanks to helpful posters for all the information. Well it all seems quite complicated. But might not cost as much as they think perhaps? Yes it was kind and generous of them to buy the first house, I appreciate that. I think maybe point them in the direction of an accountant who can be told the whole situation.

Astounded, no it is not because of fear of abuse. It is to do with where the child attends school. So if she were in the new area she would be fine there for many years. I think you were on to something about inheritance etc. I suppose people don't like to give up control.

Because quite possibly as elderly people that did something enormously kind a mere few years ago they don’t want to once again go through the process of selling up and buying.

Heartbreak But that poster was unhelpful actually. Just wanted to pass judgment, not give helpful advice. There are posters like that all over the place.

I am not asking, for example, if my 9 year old nephew should pay me back for a £1500 TV he damaged. I was hoping for some serious advice re tax etc. Which I did get from many other posters. Thank you to them. Just have a lot going on the moment and run out of patience really with people like that. And I did say 'please' stop replying. Do you honestly think that poster was trying to help?

I sold a house and paid CGT last year.
I'm pretty sure there are also allowances that you can offset again total liable for cgt such as legal fees for the purchase of the house

Thanks, obviously this needs looking into more deeply.

Yes - you can deduct solicitors fees and the costs of estate agents from the sale from the capital gain
It's not hard to do yourself on a tax return

It would be the level of income tax that they pay that dictates that

Soontobe60 I can assure you it is not me! We have also given a lot of support to this relative. And it's nothing to do with 'getting into a school catchment'. You are jumping to conclusions. Like I said, I cannot give more info in case it's identifying.

But also the gain could push them into the higher rate band.

However With all the deductions you can make - say it's a total of £6k (estate agent fees for sale, legal fees on purchase and sale, any stamp duty on initial purchase plus any capital / improvement- not maintenance - spends). Then if owned jointly -each being able to use their CGT allowance the capital gains tax due is probably nowhere near as much as you'd think. Maybe about £5-6k in total between them.

You can’t just apply to a random council and get a house, that’s not how it works. Don’t post when you clearly don’t know what you’re talking about. Only the council in the area she currently lives in has a duty of care, and only if she’s homeless.

can you stop replying please

you sure did! 😂

It sounds to me like these parents are under pressure.

I hope the friend advocates for them

They won’t pay CGT on the whole 50K gain, there’s an allowance of about £12500 so they would only pay on the chunk after that. They could also offset any costs of anything they’ve done to enhance the value like a conservatory or extension.

if they’re not motivated by money maybe they can still do it. Especially if the new area is a bit cheaper or the relative would be happy to downsize.

The CGT bill shouldn't be huge though

Still doesn’t mean she will get a council house in area she has zero ties to and whilst she isn’t homeless - there are hundreds of families all over the country stuck in hotel hopping all over their county every day or two for months on end due to being homeless, no temp accom available and certainly no council houses.

I’m a chartered accountant. There are red flags here left, right and centre so please hire someone.

1. to answer your q as everyone has, yes they are liable to CGT but exemptions will come from allowance
2. allowing a member to stay rent free in a property has tax implications if they ever attempted to claim any expenses.
3. if your parents were to gift you the property you’d still be liable for SDLT if there is any type of mortgage attached.
4. if there is a mortgage, renting to a family member would be in breach.

I’m assuming there’s no mortgage though so only 1 applies.