Capital Gains Tax On An Inherited Property

[Budlet]

I inherited a property following my father's death. I put a new kitchen in, new carpets, decorated throughout and landscaped the garden. It was sold five months later. I have been told there is a capital gains tax to be paid? How is that so? The value of the property had not increased in those five months.

[fiction-factory]

Maybe it's the increase in value between zero/some nominal figure and the sale price. Dobsbody or another tax expert may be able to give a defiitive answer soon

[fiction-factory]

From the Which site:

Capital gains tax and property
Cottage
Normally there's no CGT on your main or only home
Capital gains tax is normally not payable on gains you make on your only or main home, because these qualify for private residence relief (PRR). But all or part of any gain will usually be taxable if:

You develop your home – for example by converting part into flats
You sell part of your garden and your total plot is over half a hectare (1.2 acres)
You use part of your home exclusively for business
You let all or part of your home (but see below)
You live away (though gains relating to some absences are tax-free, including the last 18 months)
You bought or improved the home wholly or partly for the purpose of making a profit.
If you need more help with your capital gains tax questions, or any other

[fiction-factory]

http://www.which.co.uk/money/tax/guides/capital-gains-tax-explained/capital-gains-tax-and-property/

[237SJ]

Did you have the property valued for probate purposes? Capital gains tax is paid on the gain from the figure that was used for probate.

[fiction-factory]

Selling the property
You don’t pay Capital Gains Tax when you sell your home. You do pay it if you make a profit when you sell a property that isn’t your main home.

If inheriting a property means you own 2 homes, you’ll have to nominate one of them as your main home. You must tell HMRC which property is your main home within 2 years of inheriting the property.

If you don’t tell HMRC and you sell one of the properties, they’ll decide which property was your main home.

[fiction-factory]

If you had two properties you could have decided which one was to be treated as your main home.

[Tilly2]

I don't understand how the property had not gone up in value when you made all those improvements.

I know I 'm not answering your question.

[fiction-factory]

Did you already have a property, Budlet?

[New Judge]

Who has told you that CGT is payable?

When you inherit a property you inherit it at its market value at the time of the death (it should have been valued for probate purposes). CGT is payable on the difference between that value and the sale price. Everybody has an “Annual Exempt Amount” (Currently £11,100) and CGT is only paid on gains above that sum. Furthermore, in most cases the cost of many improvements such as those you describe can be deducted from any profit you make, thus reducing your tax liability.

[237SJ]

NJ - are you sure that improvements can be deducted? I know that maintenance (rather than improvements) can be used to reduce tax when renting a property but I wasn`t aware that one can improve a property, sell it and deduct the improvement costs from any tax due.

[237SJ]

"letting" not renting

[ubasses]

Yes that is correct. Money you have paid out of your own pocket reduces the amount of the gain you actually made.

[New Judge]

I think so, in most cases, 237. I’ve cribbed this, but was roughly aware of it:

======
Not all improvement costs are allowed as a deduction. To be allowable the expenditure must have been

- Incurred ON the asset
- For the purpose of enhancing its value, and
- It must be reflected in the state of the asset at the time of the disposal
=======

So landscaping a garden, for example, would seemingly fit the bill.

However, I don’t think that’s the issue here. I only added it for information. The issue here seems to be that Budlet seems to be telling us that the property had not increased in value (i.e. that the probate valuation and the sale price were the same).

[237SJ]

Thanks NJ and Ubasses. I wasn`t aware that you could do up a property and deduct the costs from the tax liability. Not sure about the OP though as I would have thought the improvements would have raised the price above the probate valuation.

[Dogsbody2]

You are only liable to pay CGT when you sell the property. If you haven't sold it, no CGT (yet). End of.

The amount of CGT liability, when it occurs, will be assessed on the difference between what you eventually sell at, minus the probate value, minus the allowable cost of capital improvements, as debated by others above. So keep records and receipts, as you may need them later.

Finally, in the tax year in which you sell (realise the value of the asset), you will be able to deduct your annual exempt amount, as covered by NJ above.

[fiction-factory]

I think it has been sold, Dogsbody2, as the OP said " It was sold five months later."

[Budlet]

Thanks for all your answers. I need to find out what the probate value was. My parents separated ten years ago and my father gave mum half the value of the property at the time - it was valued at £150,000 in 2006. It was sold in 2014 for £160,000 by me following dad's death.

[Dogsbody2]

When you're up to your arris in alligators, it is easy to overlook the original task wording, which was to drain the swamp. Well spotted.

[Dogsbody2]

It's the probate value you inherited, Budlet, that's important to know.

[Tilly2]

it was valued at £150,000 in 2006. It was sold in 2014 for £160,000 by me following dad's death.

It has only gone up by £10,000 in 8 years? Where is the house?