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capital gains tax

25 replies

popsycal · 29/12/2003 15:49

anyone with knowledge of how this works following an inheritance of a house or of any straight forward websites that could help my mum out would be greatly appreciated
we know the basics but neeed afew more details
if you would rather, you could contact me on email via mumsnet
all help appreciated

OP posts:
Jimjams · 29/12/2003 15:53

Dh is a tax solicitor. Do you have any specific questions? I could ask him tonight.

popsycal · 29/12/2003 16:00

jimjams
basically mum and sis have inherited my grandfathers house
at the moment they do not intend to sell it but intend to 'do it up' before selling it

  1. how much can they 'earn' a year before payng capitals gains tax?
  2. is the rate 40% for any earnings or is it graded llike the tax you pay on your wages (Ie do you pay more tax the more you earn?)
  3. say for example that they are each allowed to earn 7000 a year without paying tax and say they sold the house in 3 years - would they be allowed to make 21,000 each (7000 per year accumulated over time) or just 7000(ps i have plucked these figures out of thin air btw!!)

Is there a straight forward website that we could look at??
Thanks jimjams and mr jimjams!!!

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wilbur · 29/12/2003 16:01

popsycal, we have just sold my father's house which he left jointly to my sister and I, following his death in July. So I know how it all works from a tax pov. A lot depends on whether your mother was left the property as a specific bequest, or whether she is simply inheriting the residual of an estate. What were the details you needed? There's also a good Which book about wills/inheritance law/tax which might help your mum. Try here .

popsycal · 29/12/2003 16:05

cheers wilbur - i have posted the questions below
also your link didnt work properly - what is the title of the book?

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popsycal · 29/12/2003 16:05

i thikn that she is inheriting the estate...will have to chevck

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LIZS · 29/12/2003 16:12

Have you tried looking here Capital Gains Tax . They have a frequently asked questions area. Also you may need to check whether they would be subject to Inheritance tax first.

popsycal · 29/12/2003 16:16

they have a solicitor - they know about inheritance tax - but i will just remind my mum of that
thanks for the website link!!!
i will pass that info on

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LIZS · 29/12/2003 16:21

sorry, just realised that that website is a bit un-user friendly. I'm sure the info is there somewhere just fighting to get out! My Dad used to deal with this so I'll pass on your queries if you can't get answers in the meantime.

wilbur · 29/12/2003 16:21

Sorry posts crossed and I don't think my link worked. As far as I understand it (although do check with jimjams' dh!) the answers are:

1)There is a difference between the capital appreciation of the house and any earning your mums and her sis make from it. Basically, when your grandad died, his estate will have been assessed for inheritance tax which is payable at a flat rate of 40% over £255,000 (I think that's the right number). So if his house was worth, say, £150,000, and he had other assets worth £100,000, there would be no tax to pay on his estate. If his house were worth £300,000, plus assets of £100,000 then you would pay tax on the amount over the tax threshold. Once the inheritance tax (if any) is paid, there is no more tax liability on the people inheriting the house until they start to earn any money from it. So, if your Mum sold the house straight away for the same amount as was stated on the inheritance tax form, she would not pay any capital gains tax. If she sold it at a later date for more than the amount stated on the inheritance tax form she would be liable for capital gains tax on the difference between the two prices. (House valued at £100,000 for probate, then sold for £110,000 would mean a £10,000 capital gain). However, both she and your aunt can make a capital gain of £7000 (this used to be the figure but it may have changed) in any tax year before paying tax, so you can knock £14,000 of any capital gain before working out what her tax bill would be. If she earned any money from renting it out, that would be taxed like regular income.
2) I believe capital gains tax is a flat rate, or perhaps it is just whatever your highest tax rate is. Maybe try the Inland Revenue website to get that confirmed.
3) I'm pretty sure that you cannot carry your capital gains allowance over to following years - you are assessed for the year in which you made the gain (ie the year in which she sold the house) and can't count any previous unused allowance. What your Mum might be able to do though, is split her half with your dad (if they are still married) as there is no tax on transfers between husband and wife and then he would have his £7000 allowance to set against any profit on the house. Another thing to check is whether you are allowed to claim the cost of doing up the house (paint, labour etc) against any eventual capital gain. That would be a question for mrjimjams.

Hope this long essay helps a bit!

wilbur · 29/12/2003 16:23

"The Which? Guide to Wills and Probate" is the book - mostly about inheritance, but it does have a bit about capital gains.

wilbur · 29/12/2003 16:24

Try www.inlandrevenue.gov.uk.

popsycal · 29/12/2003 16:26

tahnks soooooooooo much folks
i have just emailed my mum and this is sure to be lots of help to her!!

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Jimjams · 29/12/2003 19:47

Mr Jimjams replies:-

  1. CGT free uplift would apply on grandfather's death so the 2 daughters wld have a CGT base cost of market value at date of death. Obviously, a reasonably quick sale therefore with any gains on their respective 1/2 shares within their annual exemptions shld result in no CGT. Annual exemption for 2002/03 is £7,800 roughly - the Budget generally pegs it up slightly so keep an eye on that.

  2. CGT works on top slicing - ie if you are a 40% taxpayer , CGT @ 40% , if a 20% taxpayer, CGT @ 20%

  3. Afraid not, if sale after 3 yrs presumably/hopefully mv goes up, only one years ae available (no carry forward), possibly some non-business asset taper relief & enhancement expenditure.

Jimjams · 29/12/2003 19:47

don't understand much of that- hope you do.

Jimjams · 29/12/2003 19:49

oh maybe it does make sense....

popsycal · 29/12/2003 19:50

thanks mr jimjams!!!
does he know thatif say they sell it in afew years, they can do anything to subtract the cost of improvements that they have made?
mr jimjams?

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popsycal · 29/12/2003 19:50

what if my mum doesnt work....therefore doesnt pat tax on wages as she deosnt get any??

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popsycal · 29/12/2003 19:57

or pay tax even = dont knwo what 'pat tax' is..maybe for living in a foreign country - maybe that would be ex-pat tax.....
sorry - long day...

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Jimjams · 29/12/2003 20:58

I had a quick word and apparently:

She'll get her tax allowance free then she'll pay 20% on anything on top.

Apparently "enhancement expenditure" is the cost of improvements so there may be some relief there, but it is quite complex when you start getting into what is allowed as an expense and what isn't.

popsycal · 29/12/2003 21:08

thanks again jimjams!!!

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robinw · 30/12/2003 05:02

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popsycal · 30/12/2003 17:55

wow - thanks folks!!!
one final question - should my mam and her sister allow my sister to live there rent free for a while, where do they stand?
do they have to charge her rent (and therefore pay capital gains on that?)
they dont want to charge her rent but are worried about the legality.....
thanks aagin for your help!!
pops x

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LIZS · 30/12/2003 18:26

I think that they don't have to charge rent but would pay income tax on any rental income they did charge over and above their annual tax allowances. However expenses can be offset, including any agents fees, against rental income for tax purposes. Don't think it would affect CGT until they came to sell.

popsycal · 30/12/2003 19:27

thanks LIZS!!

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robinw · 31/12/2003 09:06

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