Are you in financial agony? Ask Paul Lewis, broadcaster and our financial agony uncle. Is there something you’ve always wanted to understand about money? Do you need to know your rights? Have you been in a situation where you think you’ve been ripped off?
Paul can help. He can’t take on individual cases or try to force firms or the Government to be reasonable. But you can send all those questions about things that puzzle you to paul.lewis@inews.co.uk and he will answer some of them in this column. Remember, it’s your column so get those questions coming in.
Jeanie emailed
I am 72 and thankfully in good health. Following my husband’s death in 2015, I inherited a flat which was valued at £120,000 at probate. I didn’t need to pay inheritance tax. Since then it has continued to be rented out and I do self-assessment forms for HMRC each year.
I am now in the process of selling the flat with completion in the next week or so, in order to help my daughter and her husband do a much-needed refurbishment on their house. I will receive £170,000 and want to pass as much of this to her as possible. I am a lower-rate tax payer.
I realise that I will probably have to pay capital gains tax (CGT) or does that change if I am gifting this money? I have heard something about a seven-year rule but don’t understand it. Are these connected? Is there a time limit if I need to pay this tax? Also what would the tax consequences be for my daughter?
I realise how fortunate I am to have this type of “worry” in the current climate, but want to do the best and right thing.
Paul replies
CGT is only paid by about 350,000 people each year but it is a tax that can leap up and bite you unexpectedly.
It is paid by investors, business owners and some property owners who make a profit when selling houses or flats they do not live in.
Selling a second home is one of those occasions when you have to get to grips with its weird rules and, as we will see, do that very quickly.
Since you wrote, you tell me you have completed your sale and are just waiting for the money to be transferred. Budget Day is 30 October and Chancellor Rachel Reeves is widely rumoured to be planning some changes. If she does they could come into effect the next day. But it is the current rules that will affect you.
You say you are giving your daughter the money from the sale of your second home. That does not affect your liability for CGT which arises when you sell it.
As it is a gift of money, no tax is due from your daughter. The only time she may have to pay inheritance tax is if you die within seven years.
This is the rule which means no tax is due on any gifts you give if you live for seven years after giving them.
Again, the Chancellor may change these lifetime gift rules. We can only wait and see.
You became the owner of the flat after probate in 2016 when it was valued at £120,000. So that is the base amount for CGT. You sold it for £170,000 after all costs so CGT is potentially payable on that £50,000 gain.
As you inherited it there are not likely to be any costs of acquiring it. If there were then you would add them to the initial value. You could also take account of the costs of any improvements you made. That does not cover decorating or, of course, any of the expenses of letting it out over the years which you will have claimed against the income tax paid on the rent.
But if, for example, you replaced the windows or the roof, that would add value to the property and you could add those to the initial value. And if you had not taken account of the costs of selling, those can be deducted too. Any costs taken into account will need receipts or other evidence. None of that applies to you so the net gain is still £50,000.
You also say the flat has been let out from the day you inherited it and you have never lived there as your main residence. Unfortunately, that means what is called private residence relief is not available to you. If it were, you would have reduced your CGT bill by more than £1,000. Any readers selling a second home which at some point they lived in should check these rules.
From your net gain of £50,000 you can deduct the annual CGT allowance which this tax year is only £3,000 – it was £12,300 a couple of years ago – leaving £47,000 to be taxed.
That is added to your other anticipated income this tax year 2024/25, which let us say is £30,000. That comes to £77,000.
The amount above the higher-rate tax threshold of £50,270 is taxed at the higher CGT property rate of 24 per cent (reduced last April from 28 per cent) and the rest of the gain is taxed at the basic CGT rate for property of 18 per cent. Your other income is taxed as it would have been.
On those figures the excellent HMRC CGT calculator says the tax due is about £10,000, leaving your lucky daughter almost £160,000 for her refurbishment. However, I strongly recommend you ask an accountant to check these calculations or if there are any costs you can offset or changes you can make to reduce the tax. A small fee for a couple of hours work could save you money.
But do it quickly. You must declare this gain and pay the tax on it within sixty days of completion. In your case that is at the start of December.
The HMRC CGT calculator has a button to click to log onto your tax account and pay it. If your actual income turns out to be different from your current estimate, any underpayment or overpayment will be corrected on your 2024/25 self-assessment form – where you also have to report this capital gain.
What was that about tax not being taxing?
