Cash Clinic: Cutting the tax bill on property deals and inheritance

Q: I bought a house jointly with my son in 1993 that was lived in by some relatives. He is now buying out my share for a gain of £30,000. I am 82 and a non-taxpayer. Will I have to pay any capital gains on this sale?

DF Galashiels

A: Assuming you haven’t ever occupied the property, tax is due. As your son is a “connected person”, the gain is calculated using the market value of your half-share, regardless of what he pays you. This would normally be a little less than half the full market value (typically a discount of around 10 per cent is applied). Subject to this, on a £30,000 gain, after deducting the £10,600 annual exemption, capital gains tax (CGT) at 18 per cent leaves £3,492 payable. If you hold the property as tenants-in-common, you could sell over three tax years so each sale is exempt, although any stamp duty land tax would not be reduced.

Q: We have been approached about selling part of our garden to provide an access route for a neighbouring building development. Would we have to pay tax on such a sale?

JM Glasgow

A: The CGT exemption for selling your main residence applies to such a sale automatically if the total plot, including the part to be sold, does not exceed half a hectare and your home and garden have been occupied as your sole private residence throughout the time you have owned it. Disposals of parts of larger grounds can be exempt provided the larger area is required for “reasonable enjoyment” of the property. HM Revenue & Customs may argue that it is not so required if you are happy to sell it but, depending on the facts, exemption may still be argued successfully.

Q: My sister and I are to share our late mother’s estate, which is currently worth about £300,000. In turn I’d like to share my half equally with my two children. Is there a way to do this without having to pay an unnecessary tax bill?

CC Edinburgh

A: If you simply give the money to your children there would be no immediate tax consequences, but the amounts given will form part of your estate for inheritance tax (IHT) purposes if you die during the subesquent seven years. To avoid this, you are allowed to vary the terms of your mother’s will by executing a deed of variation which will operate as if, for IHT and CGT purposes, your mother had left your share of her estate to your children. Such a deed must be entered into within two years of the date of death.

Q: How long do I have to retain records of income from my investments in case there are questions from the tax authorities?

SD St Andrews

A: For 2009-10, you will have filed a tax return by 31 January, 2011, and must keep income records until 31 January, 2012, and self-employed or rental records until 31 January, 2016. If your return was late, keep records until 15 months after the date it was submitted. For business income you need to keep your records for five years. For capital gain or loss calculations, keep purchase and sale records for stock exchange investments (plus improvement costs for properties) until 22 months after the end of the tax year in which the asset is finally sold.

• Neil Whyte is a tax partner with accountants and business advisers PKF. If you have a question you need answered, write to Jeff Salway, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: [email protected]. This above is for general purposes only and is not tailored for individual use. It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice. No action should be taken in reliance of the information given. The Scotsman Publications Ltd accepts no liability on the basis of this article.

Cash Clinic: Cutting the tax bill on property deals and inheritance – and how long to keep paperwork?