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Brothers' tax dilema on widow’s cottage

A recent Tax Discussion Group debated the options for two brothers as they decide how to approach the sale of the cottage where their mother lives.

January 2018

At a recent Tax Discussion Group meeting, one accountant explained that he had been contacted by one of his clients to discuss his widowed mother, who had downsized from their former home to a smaller cottage some years ago.

Rather than registering the cottage in her name, the client and his brother registered themselves as its owners. The cottage was acquired for £250,000 using the proceeds received for their mother’s former home. They believed that this was sensible estate planning, believing that the cottage would fall out of her estate if she survived seven years from the date of the gift.

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Their mother is now infirm and they are planning to move her to a residential home. They approached the accountant as they plan to sell the cottage. They believe that the cottage is now worth £750,000 and the chargeable gain amounts to £500,000.

They enquired whether the chargeable gain would be eligible for main residence relief and therefore the taxable gain would be reduced to nil.

Sadly, on the facts presented it seemed that there was no trust created by their mother over the cottage. The brothers owned the property legally but also beneficially. Accordingly, the chargeable gains would be shared between them. While their mother would be eligible for main residence if the property had been in her beneficial ownership, on the facts presented there would be no main residence relief available on the sale of the property.

At the TDG meeting various possible options were discussed, a detailed analysis of which is beyond the scope of this article. These options in summary were:

  1. Not selling the property: the brothers could settle the property into a life time trust for their mother, using the rental income following their mother leaving the property to provide income taxable on her for her residential care costs. The property would not benefit from main residence relief, but the property would fall within her taxable estate and receive an uplift to probate value on her death.
  2. Investing into Venture Capital Shares: this would involve selling the property and reinvesting the proceeds into shares qualifying for EIS or similar tax relief. In such circumstances, the cottage’s chargeable gains would be deferred.

There was a brief discussion whether the brothers could relocate overseas thereby benefitting from the market revaluation availability to non-residents. The accountant explained that both brothers would be unable to relocate to undertake any such planning.

Each month (with the exception of July and August) the Tax Discussion Groups [TDG] in Croydon & South East London meet to discuss client tax issues on a no-names basis. These meetings are free to attend & normally cover over a dozen tax issues raised by those attending.

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