CGT or IHT or both

[Andy]

My situation is that 10 years ago a property was transferred to my
name. The donor continued to live there and paid me no rent. This
property then becomes a gift with reservation and so remains part of
their estate for IHT. The donor has now died and the property has been
sold. The total value of the estate was below the IHT threshold and so
I do not expect to pay IHT on it.

However, how is the property treated for my capital gains? If CGT is
payable then does this mean that potentially (if the estate had been
above the IHT threshold) we would have to pay both IHT and CGT?

 

[Troy Steadman]

My situation is that 10 years ago a property was transferred to my
name. The donor continued to live there and paid me no rent. This
property then becomes a gift with reservation and so remains part of
their estate for IHT. The donor has now died and the property has been
sold. The total value of the estate was below the IHT threshold and so
I do not expect to pay IHT on it.

However, how is the property treated for my capital gains? If CGT is
payable then does this mean that potentially (if the estate had been
above the IHT threshold) we would have to pay both IHT and CGT?

Yes.

 

[Ronald Raygun]

My situation is that 10 years ago a property was transferred to my
name. The donor continued to live there and paid me no rent. This
property then becomes a gift with reservation and so remains part of
their estate for IHT. The donor has now died and the property has been
sold. The total value of the estate was below the IHT threshold and so
I do not expect to pay IHT on it.

However, how is the property treated for my capital gains? If CGT is
payable then does this mean that potentially (if the estate had been
above the IHT threshold) we would have to pay both IHT and CGT?

Yes, this one of those cases where there is contradictory treatment.
For CGT purposes the gift was effective despite the reservation which
made it ineffective for IHT avoidance purposes.

As I understand it you are liable for the gain which occured over the
course of the last 10 years, and the donor's estate will include the
market value of the property at the time the gift was made (as opposed
to its market value at date of death).

When you say the estate was "well below the IHT threshold", I hope you
can be sure this is the case even if the value of the property is counted
as part of the estate.

 

[Robert]

Yes, this one of those cases where there is contradictory treatment.
For CGT purposes the gift was effective despite the reservation which
made it ineffective for IHT avoidance purposes.

As I understand it you are liable for the gain which occured over the
course of the last 10 years, and the donor's estate will include the
market value of the property at the time the gift was made (as opposed
to its market value at date of death).

I do nto think this is correct. Surely it is the value of the house at
the time of death that is used for the IHT calculation The value at
the time of the gift is used for the GCT calculation. The gain in value
between the two dates is therefore potentially taxed twice.

Robert

 

[Ronald Raygun]

I do nto think this is correct. Surely it is the value of the house at
the time of death that is used for the IHT calculation The value at
the time of the gift is used for the GCT calculation. The gain in value
between the two dates is therefore potentially taxed twice.

I'm not sure either, but I prefer my version to yours, because:

The fact that it was a gift with reservation doesn't mean the IHT
rules seek to pretend the gift did not happen, they simply seek to
negate the effect which treating it as a gift without reservation
would have had on the IHT due. That effect (had the gift been
without reservation) would have been to make the value of the gift at
the time it was made assessable as part of the estate, would it not?

After all, instead of gifting the house to the donee, the donor could
have gifted him enough money to buy the house off him.

 

[John Boyle]

Yes, this one of those cases where there is contradictory treatment.
For CGT purposes the gift was effective despite the reservation which
made it ineffective for IHT avoidance purposes.

As I understand it you are liable for the gain which occured over the
course of the last 10 years, and the donor's estate will include the
market value of the property at the time the gift was made (as opposed
to its market value at date of death).

No, RR, not right. A 'gift with reservation' means HMR&C assume that for
the purposes of IHT the gift didnt occur. That means it is the value on
death that is included for IHT.

The donee would be liable for CGT on the chargeable gain on eventual
sale, i.e.sale price less value at time of gift, after indexation and
Taper relief and annual allowances, then any IHT paid that related to
this failed PET would be offset against the CGT bill. Sadly for the
donee, it appears there is no IHT to offset.

 

[Andy]

Thanks for the advice guys. Will have to bear in mind when sorting out
my own stuff.