Taxing rules will cost money

By THIS IS MONEY
Updated: 06:45 EST, 30 September 2005

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AFTER my divorce and my exhusband's debts I was left with nothing. In 1991 my mother bought a small house for £118,000 for me to live in with my two sons. She's never lived here.

A few years ago, she instructed a solicitor to transfer this house to my name but when we learnt that capital gains were involved we didn't go ahead. Another solicitor specialising in family tax said it would be best to leave well alone.

My mother is now nearly 90, and plans to go into sheltered accommodation so owning two houses is impractical. The house is now worth about £480,000 and her own house around £250,000. If she lived with me for, say, six months and then gave me the house would she still have a CGT liability? If her home were to be sold, how much could she gift to us each year?ET, London.

Money Mail's Margaret Stone says: IT IS easy to say with hindsight your mother ought to have taken steps to transfer the house years ago. If your mother gives you the house now, the taxman will almost certainly have two bites at the cherry.

Your mother will incur a substantial capital gains tax (CGT) bill on the disposal of your house as it is not her own principal private residence.

The gains will be reduced by indexation (up to 1998) and then by taper relief, but it will still be a hefty sum. If she were to move into your house for a few months, she could exempt some of the gain, but not much.

If she passes the house to you now, there will in all probability be an IHT liability as well. If your mother remains the legal owner of 'your' house until she dies, you will at least eliminate the CGT liability and that's why I agree with the lawyer who said to leave well alone.

IHT seems unavoidable, but there are annual exemptions. She can make one gift of up to £3,000, plus gifts of up to £250 to other people.

As she will have a sizeable estate, she should also consider leaving some money to your sons directly, which will reduce any future IHT liability on your own estate.

This is Money adds: Take a look at our new Wills and Tax section which will help you minimise your CGT and IHT obligations. In particular, check out our dedicated inheritance tax page for more tips.