Q Just over three years ago my stepmother, for whom I now have sole registered enduring power of attorney, went into a nursing home. Her income just about meets the cost of her care. I left her house empty with the intention of selling it, as and when necessary ? either on her death (although the sole executor I am only a 20% beneficiary) or when she needs further income. I was therefore alarmed to read of the three-year rule whereby capital gains tax (CGT) is charged on the sale of the property.
If the house is sold prior to her death, from what date is the base value for CGT assessed? And does this liability come into force after three years from the date of her entering the care home, or is there a further three years after the first three years ? ie six years in total ? from the date of entering care? Am I correct in my understanding that should the house form part of her estate on her death CGT is not payable, but perhaps inheritance tax (IHT) is? TT
A To answer your last question first, yes you are right in thinking there is no CGT to pay when the house becomes part of the estate, but there may be an IHT bill. There may, however, be a CGT bill if whoever inherits the house subsequently sells it. But the gain would be calculated as the sale price less the value when the beneficiary acquired it, rather than using the value when your stepmother bought it.
If the house were sold before your stepmother's death, the gain would be calculated as the sale price less the cost of the house when she acquired it, or its value at 31 March 1982 if this was later. But not all of the gain will be liable to CGT because of the private residence relief rules, which is what the three-year rule that you refer to forms part of.
To calculate the fraction of the gain that will be exempt from CGT you take the number of months your stepmother lived in the house plus 36 (ie three years), and divide this by the number of months she owned the property. If she moved in before 31 March 1982 you should start counting the number of months of both occupation and ownership from that date.
You then multiply the gain by this fraction to give you the amount which is tax free. Subtract this figure from the total gain to arrive at the amount on which CGT will be payable.
If this is less than the tax-free amount of �10,100 (in the 2010-11 tax year), there will be nothing to pay. If the gain after private residence relief is more than �10,100 tax will have to be paid either at 18% or 28% (depending on your stepmother's top rate of income tax) on the taxable gain less �10,100.
Source: http://www.guardian.co.uk/money/2011/jan/12/capital-gains-three-year-rule
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