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Capital gains problem on inherited property sale

A Tax Discussion Group grapples with the capital gains from an inherited property – would there be any relief and who would have to pay the CGT once it is sold?

January 2019

At a recent meeting of one of the tax discussion groups, an accountant explained that his client (Mrs M) had rented out her mother’s house from the time her mother (Mrs L) died in 2010. In her mother’s will the property was left “to my trustees free of Inheritance Tax and in equal shares to my daughter [Mrs M] and her children as shall be living at my death and shall attain the age of 25 years old”.

At the time of her mother’s death, the property was worth £300,000, but now, when they are planning to sell the property, it is worth £500,000. In between, there has been little improvement to the property and therefore aside from deducting the disposal costs, the entire £200,000 gain would be subject to Capital Gains Tax (CGT).

The accountant’s query arose as he had a number of questions to resolve:

  • who would be taxed on the disposal; and
  • whether there would be any relief that would be available to mitigate the CGT.

He explained that:

  • The property was registered in the names of Mrs M and her husband at the land registry, who were the executors of Mrs L’s will.
  • No formal trust was ever set up to collect the rental income with the rents declared on Mrs M’s personal tax return rather than on a Trust & Estate Return
  • Although Mr & Mrs M have three children none of them have reached 25 years old but all of them are over 18 years old
  • Mrs M is a higher rate tax payer

He wasn’t sure whether the capital gains were to be taxed on Mrs M and her three children or on Mr & Mrs M as trustees of a will trust. Aside from the clauses in the will, no formal trust deeds were drafted, nor any registration of the trust for self-assessment.

The discussions in the meeting concerned whether there was a will trust derived from the will or not. Moreover, if there was one, what was the nature of the trust that had been created.

It was felt that at the heart of the query was the nature of the trust and this would require a specialist private client lawyer. They would be able to confirm the legal aspects regarding the query before the tax advice could be given. It was thought unlikely that any relief from the tax could be obtained unless any of the family had been occupying the property as their main residence at any time from the date of Mrs L’s death.

The collection and taxation of the rents would appear to have been on the basis that the income was mandated by the trustees/executors. There was some surprise that the income had only been declared on the tax returns of Mrs M, rather than on her return as well as those for her three children.

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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