Cash Clinic: What a difference a space makes valuing 'life rent' inheritance
However, as the recipients of a 50 per cent share in a second home (as we both own our homes) my brother and I could be seen as having a capital gains tax (CGT) liability from a transfer valuation of 60,000 (30,000 each) to today's value of 320,000 (160,000 each). Given the new CGT flat rate and the government possibly looking to increase CGT, is it the case that the wrong option has been taken? And is it possible to be taxed under IHT and CGT on the same asset. If not, which tax takes priority?
JB, Perth
A You mention that the house was split between the two children when it was transferred, but then you also mention that your parents have a "life rent". If it is the case that the title to the house actually discloses the existence of a life rent in favour of your parents, or if the house is held in a trust giving your parents a formal liferent – a specific term in Scottish law – then this means they have a continuing legal right to reside in the property. This would be to the exclusion of the children, who will only be able to have the house as their own property when the liferent ends.
Advertisement
Hide AdAdvertisement
Hide AdThe significance of a life rent is that, for CGT purposes, the principal private residence relief is available, on the same basis as if your parents had continued to own their property outright.
When the life rent ends (on the death of your parents, or on renunciation by them, if the terms of the trust arrangements permit this) no CGT liability would arise, and the house would become the absolute property of the children. If the liferent continues until the death of both your parents the usual CGT uplift on death would apply, regardless of whether your parents had continued to live there, and with no CGT liability arising when the house becomes your own absolute property.
So it is important to check the basis on which the property was transferred. Although you refer to a life rent, is that what is actually in place, or is it some less formal arrangement by which your parents are permitted to live there at your discretion? If it is the latter, then the CGT issue arises and you and your brother would face the prospect of significant CGT on disposal of the property.
On the face of it, your capital gains may stand at 130,000 each. Assuming you each have an annual allowance available, CGT would be about 21,600 for each of you. You could consider a transfer of part of your share to your wife to make use of her allowance also, although the effect would be fairly minor (saving about 1,800). Any losses brought forward or other losses arising in the year could be used to offset the gains.
As to whether the transfer will prove to have been of financial benefit, this depends on whether it is brought into account in assessment for care fees at some future date. There is no time limit beyond which the gift can be ignored, although it is true to say that 15 years ago the position was less established. It may be possible for the house to escape assessment (for example, if an alternative motivation at the time of making the gift could be shown, such as protecting the inheritance of the children against possible remarriage). Some local authorities may not take such long-standing gifts into account, but that depends on their particular policy.
Glen Gilson is partner and head of private client and financial services at HBJ Gateley Wareing.
If you have a question you need answered, write to Jeff Salway, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: [email protected]. This above is for general purposes only and is not tailored for individual use. It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice. No action should be taken in reliance of the information given. The Scotsman Publications Ltd and HBJ Gateley Wareing accept no liability on the basis of this article.