Capital Gains Tax on Gifted Property

We recently had a capital gains tax query from a client which I think is likely to be an increasingly common one in the future as elderly care becomes more expensive and more people are forced to sell their houses to pay for this care.

The client's father had gifted the client and his two siblings his house on the understanding that he could live in it rent-free for as long as he wanted. The client's father then moved out of the house and into a care home at which point the house was sold by the client and his siblings.

Our client's question was whether he and his siblings would be required to pay capital gains tax on the sale of the house.

In fact in this situation there are two transactions for the purposes of capital gains tax. The first is the gift of the house by the father. Although no money changed hands this is still a disposal for capital gains tax purposes with the market value at the date of the gift being used instead of the proceeds of the sale.

In the event no capital gains tax was due on the first transaction because the house was the father's main residence and therefore he qualified for principal private residence relief which exempts the sale of your main residence from capital gains tax.

The second disposal was the sale of the house by the client and his siblings. The client had read that because his father had continued to live in the house after he had gifted it it might still qualify as his main residence and be eligible for principal private residence. However a technical officer from HMRC confirmed that the sale of the house was in fact subject to capital gains tax and that therefore the only exemption available was the annual exemption from capital gains tax available to all taxpayers.

The scenario also raises a further issue with regard to inheritance tax when gifting a property that you continue to live in. We will deal with this in a future video.

If you have any questions arising from this video, perhaps the same or a similar set of circumstances please do not hesitate to go to the website www.screatons.co.uk or contact us at [email protected] or 01827 715264.