Join our community of smart investors

What happens when we sell our mother's house?

Our reader would like to know more about how CGT will be applied to the sale of his mother's house, which is currently being rented out
April 12, 2018

My mother’s home is rented out and has been for the past five years as she has moved into residential care. We are considering selling the property to help pay her fees, but will delay doing this until the point that it becomes necessary. Ideally, though, the house will remain unsold while my mother is alive. My question is how would capital gains tax be applied to gains in the property value if a) the house is sold before she dies, and b) if the house is sold after her death. The house was purchased 25 years ago for around £300,000 and has a current value of around £900,000.

A Collingwood

Chris Springett, private client tax partner, Smith & Williamson, replies: Your question is an increasingly common issue faced by those dealing with a parent’s affairs as they move into later life. In both scenarios, the basic principle is that any gain (sale proceeds less cost) realised on the sale of the property will be subject to capital gains tax (CGT) at the 28 per cent rate applying to the disposal of residential property. 

The calculation of the gain in each scenario is different, however, although in each case we would not expect any CGT to be payable (subject to our assumptions made below). Of course, care and a detailed review is always needed when considering the availability of reliefs and we would recommend that professional advice is sought when calculating the gain.

There is also inheritance tax (IHT) to consider. It may be that the availability of the main residence nil-rate band (RNRB) means it is considered that no IHT will be due on sale. However, the specific rules around the RNRB are relatively complex, particularly when looking at the ‘downsizing’ provisions. As such, again, detailed guidance is advisable to ensure that any action taken that may appear beneficial from a CGT perspective does not adversely impact the IHT. We are only looking here at the CGT position.

 

a) Sale of mother’s home during lifetime

Our calculation has been prepared on the assumption that you intend to sell your mother’s home immediately and so the current valuations have been used. If the property is sold at a later date, a higher gain may arise and CGT may be due.

You estimate the sale proceeds at £900,000, although you are also entitled to deduct any legal costs of sales from this figure. 

You advise that the property was acquired for £300,000 and we assume that it has always been owned in your mother’s sole name, although there may be some uplift if some or all of the property was inherited from a deceased spouse. You can increase this cost figure for any costs of acquisition of the property, including conveyancing fees and stamp duty land tax. Lastly, when calculating the gain, your mother can deduct the cost of any improvement works carried out on the property, if they are reflected in an increased current value of the property.

Ignoring these additional deductions, however, we calculate that a gain of £600,000 would arise if the property were sold today. Two reliefs should apply to reduce this gain:

Private residence relief (PRR): PRR exempts a proportion of the gain equal to the period that the property was occupied as a main residence and we assume this was the case throughout the period prior to your mother going into care. A further 18 months of ownership also qualifies for PRR as ‘deemed occupation’ and this is extended to 36 months in your mother’s case because she left the property to move into care.

Lettings relief: This is available in respect of periods for which PRR is not available because the property was let out as residential occupation. The amount of the relief is the lower of the main residence relief, the gain accrued during the period of letting or £40,000.  In your mother’s case, the relief would amount to £40,000.

When the above reliefs are taken into account, we calculate that the chargeable gain is reduced to £8,000 and this would be covered by your mother’s CGT annual exempt amount of £11,700, meaning no CGT is actually payable.

Even though tax is not payable, your mother would be required to report the disposal to HM Revenue & Customs on her self-assessment tax return (which we assume is already being filed to report the rental income received from the property) and this will be due on the 31 January following the end of the tax year in which contracts are exchanged on the sale of the property.

 

b) Sale of mother’s home after death

We have assumed your intention would be to sell the property as an executor of your mother’s estate so that you can realise cash funds to make distributions to the beneficiaries of the estate. Whether this is possible will depend on the terms of your mother’s will.

In this case, the executors are deemed to acquire the property at its market value at the time of death (the ‘probate value’).  This means that a sale of the property immediately or shortly after death should not give rise to a capital gain.

If the value of the property should increase in the period between obtaining grant of probate and disposal of the property, however, a gain will arise and the executors will be liable to report and pay CGT on the chargeable gain. 

The gain is calculated in the same way as above, except that executors can also deduct any legal or other expenses in the administration of the estate, for instance the cost of obtaining grant of probate. The proportion of the costs relating to your mother’s property would need to be determined and allocated accordingly.

PRR is extended to executors in certain circumstances.  However, one of the conditions for this extension is that the beneficiaries of the estate need to live in the property before and after the death of the owner. Based on what has been said, it does not seem that this is a likely scenario.

Providing a sale takes place within two years of the date of death, the full annual exemption (£11,700) is available to executors, meaning that a small increase in the value of the property should not give rise to a CGT charge at 28 per cent.

As with a lifetime disposal it will still be necessary to report the disposal, in this case on an estate tax return, even in situations where no CGT is payable.