Capital gains tax question

[JudyJudyJudy]

Theoretical 

 

A person I know is in line to inherit a house

 

. He’s the dear lifelong friend of the person leaving him it . It’s currently worth £380 g and this is going up daily . Checked online but I can’t seem to find a definitive answer .

 

Will he have to pay CGT on the house ? He’s not keeping it . It’s getting flogged asap . 
 

I know if you are relative or married you may inherit it’s at a reduced rate . 
 

 

 

[Victorian]

Could be wrong but I'm thinking if it's inherited from a will then Inheritance Tax would apply,  not a gain.  IHT has a £325,000 tax free amount and then 40% on the balance.  

 

£380,000 - £325,000 = £55,000 @ 40% = £22,000 tax.

[milky_26]

1 minute ago, Victorian said:

Could be wrong but I'm thinking if it's inherited from a will then Inheritance Tax would apply,  not a gain.  IHT has a £325,000 tax free amount and then 40% on the balance.  

 

£380,000 - £325,000 = £55,000 @ 40% = £22,000 tax.

exactly what i was going to say. tax will be due on anything above the inheritance tax threshold

[JudyJudyJudy]

14 minutes ago, Victorian said:

Could be wrong but I'm thinking if it's inherited from a will then Inheritance Tax would apply,  not a gain.  IHT has a £325,000 tax free amount and then 40% on the balance.  

 

£380,000 - £325,000 = £55,000 @ 40% = £22,000 tax.

Thanks . 

[jb102]

IHT free allowance I think only applies to spouse, child or grandchild. 
Big bill coming I think. Professional advice is a must in this situation. 

Edited April 8 by jb102

[If carlsberg did rivals...]

8 minutes ago, jb102 said:

IHT free allowance I think only applies to spouse, child or grandchild. 
Big bill coming I think. Professional advice is a must in this situation. 

I've just checked the gov.uk website and it doesn't mention any particular rules for who IHT applies to, so I would imagine it's across the board. That said getting legal advice for such a large sum of money is advisable.

[Ulysses]

8 minutes ago, jb102 said:

IHT free allowance I think only applies to spouse, child or grandchild. 
Big bill coming I think. Professional advice is a must in this situation. 

 

It might be worth reading this link.

 

https://www.parachutelaw.co.uk/news/property/inheritance-tax-on-a-house

 

I'm not vouching for the website, but its advice is that regardless of who inherits, the first £325,000 isn't taxed.  It gives a specific example for someone who inherits from a friend.

 

Bequests between spouses are free of Inheritance Tax. For some bequests to children and grandchildren, the tax-free threshold is increased from £325K to £500K.

[Ulysses]

Also, it's the responsibility of the executor of a will to make sure Inheritance Tax is properly paid before the estate is handed over to the beneficiaries.

[luckydug]

if not IHT or CGT could it not be subject to a gift tax.

Gift from a friend.

[Victorian]

10 minutes ago, jb102 said:

IHT free allowance I think only applies to spouse, child or grandchild. 
Big bill coming I think. Professional advice is a must in this situation. 

 

That's not correct.  I think you're thinking about exemptions and additional tax free threshold rules.  

[PaddysBar]

2 hours ago, JudyJudyJudy said:

Theoretical 

 

A person I know is in line to inherit a house

 

. He’s the dear lifelong friend of the person leaving him it . It’s currently worth £380 g and this is going up daily . Checked online but I can’t seem to find a definitive answer .

 

Will he have to pay CGT on the house ? He’s not keeping it . It’s getting flogged asap . 
 

I know if you are relative or married you may inherit it’s at a reduced rate . 
 

 

 

Is the person dead yet?

Was he/she widowed? If so the last surviving spouse inherits the nil rate band (£325k) so total nil rate band might be £700k. 
 

As the house is not going to a child/grandchild, there’s no additional relief available. 
 

Drop me a pm if you want any more info. 

[PaddysBar]

Just now, Victorian said:

 

That's not correct.  I think you're thinking about exemptions and additional tax free threshold rules.  

Correct and you don’t need advice to work out any IHT bill, that’s for the executor to do. 
 

Financial advice in relation to IHT is mainly about mitigating any bill but useless if the person is already dead. 

[Victorian]

Just now, PaddysBar said:

Correct and you don’t need advice to work out any IHT bill, that’s for the executor to do. 
 

Financial advice in relation to IHT is mainly about mitigating any bill but useless if the person is already dead. 

 

Yep.  Executor will deal with and submit figures to HMRC and tax determined and paid from the estate.

[kila]

2 minutes ago, PaddysBar said:

Is the person dead yet?

Was he/she widowed? If so the last surviving spouse inherits the nil rate band (£325k) so total nil rate band might be £700k. 
 

As the house is not going to a child/grandchild, there’s no additional relief available. 
 

Drop me a pm if you want any more info. 

 

They will be if house prices were to start falling

 

[JudyJudyJudy]

45 minutes ago, PaddysBar said:

Is the person dead yet?

Was he/she widowed? If so the last surviving spouse inherits the nil rate band (£325k) so total nil rate band might be £700k. 
 

As the house is not going to a child/grandchild, there’s no additional relief available. 
 

Drop me a pm if you want any more info. 

No he’s alive but quite old now .  Never married . No kids . 👍

[Pap]

5 hours ago, JudyJudyJudy said:

No he’s alive but quite old now .  Never married . No kids . 👍

 

Does he know his house is getting flogged asap?

[Sooperstar]

5 hours ago, Pap said:

 

Does he know his house is getting flogged asap?

The dear friend is checking the value of the house daily and already has it sold before the poor old codger is dead. Sounds like they will be heartbroken when the time comes! 

[cazzyy]

Is that a thing, befriending old "single, never married men with no kids and a big house" and snapping up their property when they check out?

And if it is, is it not double greed to worry about paying any tax liability on it?

Has he got a nice car?

Is he looking for other "friends"?

[JudyJudyJudy]

6 hours ago, Pap said:

 

Does he know his house is getting flogged asap?

Yes he’s aware of the plans . Like I said the other person has their own house anyway . What’s the point having two houses ? Too much hassle . Best spending the money , Perhaps retiring and enjoying it rather than have it all tied up in a property you can’t do much with ? Enjoy the money while one can really . Leave nothing for the taxman when it’s one’s time to go . They already get enough tax when you are alive . 

1 hour ago, Sooperstar said:

The dear friend is checking the value of the house daily and already has it sold before the poor old codger is dead. Sounds like they will be heartbroken when the time comes! 

Oh he’s perfectly aware . Oh it’ll be a sad time when he departs this life but life goes on as they say and I know the old person wouldn’t want his friend grieving every single day and mopping about . 

[I P Knightley]

IHT applies to the total value of the estate and will be based on a valuation of the house - i.e. whether or not it is sold. Obviously, if tax becomes due, if he's the sole beneficiary of the estate, it's effectively up to him to find the amount due. 

 

As others have said, there is a £325k tax-free amount (not sure what it is in Scotland) and he'd have to find 40% of the difference between £380k and £325k (£22k). Obviously, if selling the house, that's a source of the cash. If he'd wanted to hold on to it as a rental property perhaps, he'd still be liable and would have to get cash some other how. 

 

Academic based on what you've written, but CGT only applies if you've bought or been gifted an asset at a certain value and sell it later at a higher value. So, if he held on to the house but later sold it for £480k, subject to a few allowances, he'd be liable for CGT on the gain of £100k - as long as it wasn't his principal private residence. See Angela Rayner's "case" for more detail on that!

[I P Knightley]

14 hours ago, jb102 said:

IHT free allowance I think only applies to spouse, child or grandchild. 
Big bill coming I think. Professional advice is a must in this situation. 

Not true. 

 

The £325k applies to the estate regardless of the beneficiary. The thing about kids is an additional £175k.

 

14 hours ago, luckydug said:

if not IHT or CGT could it not be subject to a gift tax.

Gift from a friend.

No such thing as gift tax although if you receive a gift of a house (or any other substantial asset), it could well fall into the scope of CGT when it's eventually disposed of. 

 

 

14 hours ago, PaddysBar said:

Was he/she widowed? If so the last surviving spouse inherits the nil rate band (£325k) so total nil rate band might be £700k. 
 

Drop me a pm if you want any more info. 

Word of advice to @JudyJudyJudy... if you do pm PaddysBar for more info, get it double checked. Last time I looked, two lots of £325k came to £650k.  

[JudyJudyJudy]

12 minutes ago, I P Knightley said:

he'd still be liable and would have to get cash some other how. 

Good point ! Another good reason to sell it then . 

[Footballfirst]

6 minutes ago, JudyJudyJudy said:

Good point ! Another good reason to sell it then . 

Be aware that he may have to raise the cash to pay the IHT before the house is sold, so may have to incur the cost of a bridging loan. 

[JudyJudyJudy]

3 minutes ago, Footballfirst said:

Be aware that he may have to raise the cash to pay the IHT before the house is sold, so may have to incur the cost of a bridging loan. 

Oh .   it’s such a minefield really . Surely he could inform the tax office he will pay it off the proceeds of the house sale ? 

[kila]

Can you use a credit card to pay the tax due? If he got an interest free/balance transfer one for the £22k (assuming the house can be used as security).

 

[Footballfirst]

16 minutes ago, JudyJudyJudy said:

Oh .   it’s such a minefield really . Surely he could inform the tax office he will pay it off the proceeds of the house sale ? 

I'm not 100% sure how it works, but I'm sure others will have gone through the process as executors for a parent or a friend's estate.

 

My understanding is that this will be deemed a "large estate" in Scotland because its value will be over £36,000. The executor will have to obtain a "Certificate of Confirmation" from a Sheriff Court (for a fee - £565 currently) in order to enable all the assets of the estate (house, cash, bank balances, investments etc) to be released to him/her. The "confirmation" requires an inventory of assets to be created and the calculated IHT to be paid in advance of the certificate being given. It can take weeks or months to obtain the certificate.  The executor should have the authority to get a loan to cover the IHT amount if they don't have the funds available.  The repayment of the loan would come out of the estate before distribution to the beneficiaries.

 

However, the house can be put on the market while awaiting the certificate. An offer can be accepted "subject to confirmation".

 

https://www.scotcourts.gov.uk/taking-action/dealing-with-a-deceased's-estate-in-scotland

 

That's how I believe the system works but I'm sure others will have had a real life experience of the process.

Edited April 9 by Footballfirst

[JudyJudyJudy]

38 minutes ago, Footballfirst said:

I'm not 100% sure how it works, but I'm sure others will have gone through the process as executors for a parent or a friend's estate.

 

My understanding is that this will be deemed a "large estate" in Scotland because its value will be over £36,000. The executor will have to obtain a "Certificate of Confirmation" from a Sheriff Court (for a fee - £565 currently) in order to enable all the assets of the estate (house, cash, bank balances, investments etc) to be released to him/her. The "confirmation" requires an inventory of assets to be created and the calculated IHT to be paid in advance of the certificate being given. It can take weeks or months to obtain the certificate.  The executor should have the authority to get a loan to cover the IHT amount if they don't have the funds available.  The repayment of the loan would come out of the estate before distribution to the beneficiaries.

 

However, the house can be put on the market while awaiting the certificate. An offer can be accepted "subject to confirmation".

 

https://www.scotcourts.gov.uk/taking-action/dealing-with-a-deceased's-estate-in-scotland

 

That's how I believe the system works but I'm sure others will have had a real life experience of the process.

👍👍👍

[PaddysBar]

2 hours ago, I P Knightley said:

 

 

Word of advice to @JudyJudyJudy... if you do pm PaddysBar for more info, get it double checked. Last time I looked, two lots of £325k came to £650k.  

I did that on purpose to put him off, honest😂

Edited April 9 by PaddysBar

[Dboy]

OPs question was on the CGT position of the recipient of the gift.

His friend inherits the gift at market value of £380K (and rising) and sells it at its market value at the date of sale.  The gain is the difference between the two.  It is unlikely that there would be any held over gains that would reduce the market value if it is a residential house.

 

the donor of the gift (the old man) sells his property at market value and he makes a gain and will have to pay capital gains tax on the gift (dependent on the nature of the property, eg if it the house he lives in there may be some reliefs that exempt the gain).

 

the inheritance tax for the old man is a separate issue and there are too many unknowns.  The gift will be potentially exempt from inheritance tax (needs to survive a good number of years) but there are many other issues that would have to be considered on this front

 

[I P Knightley]

7 hours ago, JudyJudyJudy said:

Good point ! Another good reason to sell it then . 

As others pointed out, timing will be an issue. I've no idea how long it takes to settle IHT once the value of the estate has been agreed. I suspect there's a few months and it would be easy to get a loan of £22k against the value of the house, knowing that it's going to be sold. 

 

If he were inclined to make a business from the house, letting it our or running a brothel from it or something, he could take a similar short term loan against the future business income. 

 

I doubt he'll have a problem with it. 

[Victorian]

Nice problem to have tbf.  I wouldn't be too desperate to minimise a tax liability of approx £20k arising out of a £380k lift.  That amount of capital will quickly attract interest in excess of the tax.  

[JudyJudyJudy]

1 hour ago, I P Knightley said:

As others pointed out, timing will be an issue. I've no idea how long it takes to settle IHT once the value of the estate has been agreed. I suspect there's a few months and it would be easy to get a loan of £22k against the value of the house, knowing that it's going to be sold. 

 

If he were inclined to make a business from the house, letting it our or running a brothel from it or something, he could take a similar short term loan against the future business income. 

 

I doubt he'll have a problem with it. 

👍

59 minutes ago, Victorian said:

Nice problem to have tbf.  I wouldn't be too desperate to minimise a tax liability of approx £20k arising out of a £380k lift.  That amount of capital will quickly attract interest in excess of the tax.  

Yep

[Greedy Jambo]

I think you and me should be friends @JudyJudyJudy Would you say that you have a good few years a head of you? to be friends...

 

[Footballfirst]

1 hour ago, I P Knightley said:

As others pointed out, timing will be an issue. I've no idea how long it takes to settle IHT once the value of the estate has been agreed. I suspect there's a few months and it would be easy to get a loan of £22k against the value of the house, knowing that it's going to be sold. 

 

If he were inclined to make a business from the house, letting it our or running a brothel from it or something, he could take a similar short term loan against the future business income. 

 

I doubt he'll have a problem with it. 

You are making an assumption that the house is the old guy's only asset with the £22k IHT liability.  If he has say another £120k of cash and investments, then that would make the value of his estate £500k.  At that level £175k would be liable to IHT, i,e. a liability of £70k.  Pro rated, the house would account for £53,200 of the liability. 

 

Might be better that the executor sells the house and gives the beneficiary the balance, after IHT, sale and legal costs are deducted. 

[JudyJudyJudy]

1 hour ago, Greedy Jambo said:

I think you and me should be friends @JudyJudyJudy Would you say that you have a good few years a head of you? to be friends...

 

I could pop off at any time really ! 😎 best be quick 😂

[JudyJudyJudy]

1 hour ago, Footballfirst said:

You are making an assumption that the house is the old guy's only asset with the £22k IHT liability.  If he has say another £120k of cash and investments, then that would make the value of his estate £500k.  At that level £175k would be liable to IHT, i,e. a liability of £70k.  Pro rated, the house would account for £53,200 of the liability. 

 

Might be better that the executor sells the house and gives the beneficiary the balance, after IHT, sale and legal costs are deducted. 

More good points ! 

[Greedy Jambo]

7 minutes ago, JudyJudyJudy said:

I could pop off at any time really ! 😎 best be quick 😂

😂😂