Capital Gains Tax on sale of house used to fund care?

[Wheresmygin]

Hello TP
We have recently sold my MiL's house (sons have finance and health LPA).
The money has gone into her account and will fund her care home for, we think, about 3 years.

My question is, does she have to pay capital gains tax on the proceeds of her house? This is being used for nothing other than her care home. She buys her own clothes and pays for her hairdressing, and her dog - food and vets - but otherwise her money is purely for her care.

Really appreciate the advise as I'm sure lots of you have been through the same thing.

Thanks
Wheresmygin x

 

[Kevinl]

As long as it was her principle private residence before she went into care then no.
There was a plan to change the rules in the situation that someone went into care so that after 3 years it would be deemed to be a second home and taxed as such but I don't believe this went through when the person is in care, it does apply in other circumstances though.
The CGT would only apply to the increase in value of the house from when it was vacated and you have about £11,000 exemption anyway so as long as it hasn't been rented out I can't see any liability.
K

Edit: It appears the exemption is now only 18 months not the 3 years I said.

 

[Kevinl]

Correct myself again back to a 3 year exemption according to the government website it is still 3 years:
"If you only own one home you get relief for the last 36 months before you sold your home if any of the following apply:
you’re disabled
you’re in long-term residential care"
So long term care is still the 3 year exemption.
K

https://www.gov.uk/tax-sell-home/absence-from-home

 

[lemonjuice]

How interesting in that I was going to post my own thread about this.

My situation is slightly different in that my mother has lived in her NH for 5 years and we've rented out the house to help the shortfall between her income and her fees.
Never thinking she'd survive this long. When she was dying from heart failure in hospital 5 years ago her Dr said she'd be unlikely to be alive in 5 years and as I was exhausted by her care and after that stay in hospital her condition deteriorated that when she came home she didn't even recognise her home, where to go to the bathroom etc it was decided it was best to put her in a NH.

Now we face selling her home and aware it counts as 'an asset', though we hadn't been aware before or we might have done things differently.

It does seem unfair that she will automatically lose a large amount of money from the sale of the house, when it is purely to fund her care and we now face having only a couple of years before SS take over and possibly move her. Plus as there's nowhere to invest the money, she will run out in a couple of years.

Who do we have to notify and how do they calculate the 'increase in value in the 20+ years she lived in the house?

 

[jenniferpa]

Kevin will correct me if I'm wrong but I think they only would consider the increase in value for the 5 years since she left the property. Now what I don't know is if she still gets the 3 year exemption or if that's gone for good.

 

[lemonjuice]

Kevin will correct me if I'm wrong but I think they only would consider the increase in value for the 5 years since she left the property. Now what I don't know is if she still gets the 3 year exemption or if that's gone for good.

That would be to her advantage, as house prices have almost fallen in her cul-de-sac. All elderly and several had to move into care. Two homes have had to reduce prices by over £30,000 (I've been keeping a watch on prices for this eventuality) and haven't even sold yet after 6 months. The only one which has is one put on at a much lower price in the first place.

 

[Pete R]

Kevin will correct me if I'm wrong but I think they only would consider the increase in value for the 5 years since she left the property. Now what I don't know is if she still gets the 3 year exemption or if that's gone for good.

You still have to take the price it originally cost and then the price it sold for (minus certain expenses) but I believe you still get the 3 years and what is called "Private Residence Relief". There is also "Lettings Relief"

The examples here a quite easy to understand but use the normal 18 month exemption instead of the 3 years.
https://www.gov.uk/tax-sell-home/let-out-part-of-home

 

[jenniferpa]

Thank you Pete.

 

[oilovlam]

You still have to take the price it originally cost and then the price it sold for (minus certain expenses) but I believe you still get the 3 years and what is called "Private Residence Relief". There is also "Lettings Relief"

The examples here a quite easy to understand but use the normal 18 month exemption instead of the 3 years.
https://www.gov.uk/tax-sell-home/let-out-part-of-home

"You still have to take the price it originally cost....."

Surely the 'original' cost isn't what I think it means. If you bought your house in the 1960's the 'original' cost would be low and the CGT liability would be massive. I would hope the 'original' cost would be the valuation at the point the person went into care or (perhaps) 3 years after that date.

Presumably there should be a professional house valuation made to determine the 'original' cost. I expect estate agents charge for such a valuation. I expect that if you didn't have an 'original' valuation that HMRC could argue if they think your estimation is a little high.

All of the above are my thoughts and may have no substance.

 

[Pete R]

"You still have to take the price it originally cost....."

Surely the 'original' cost isn't what I think it means. If you bought your house in the 1960's the 'original' cost would be low and the CGT liability would be massive. I would hope the 'original' cost would be the valuation at the point the person went into care or (perhaps) 3 years after that date.

Presumably there should be a professional house valuation made to determine the 'original' cost. I expect estate agents charge for such a valuation. I expect that if you didn't have an 'original' valuation that HMRC could argue if they think your valuation is a little high.

All of the above are my thoughts and may have no substance.

I have looked into this as Mom has been in care for 2 years now and only know what I have read which is.....
"Your gain is usually the difference between what you paid for your home and what you sold it for."
The amount could be massive however you will get "Private Residence Relief" which I mentioned above. So if you have lived in the house all your life apart from the last 3 years in care you pay NO CGT.

Hope that is correct.

 

[oilovlam]

I have looked into this as Mom has been in care for 2 years now and only know what I have read which is.....
"Your gain is usually the difference between what you paid for your home and what you sold it for."
The amount could be massive however you will get "Private Residence Relief" which I mentioned above. So if you have lived in the house all your life apart from the last 3 years in care you pay NO CGT.

Hope that is correct.

If that is correct then PERHAPS the house should be sold BEFORE the person goes into care. Then buy an identical house (for the same money). When the person goes into care the new house can be rented out. When the house becomes liable for CGT the 'original' price paid will the price you paid for the new house. Seems crazy to me....but if it was allowed then it would avoid a lot of potential CGT (assuming that the first house was owned for a long time). Obviously there will be a lot of estate agent fees to pay...but perhaps there are ways to reduce them.

I would check first what the term 'original' value means before doing the above.

 

[ricci1003]

Someone mentioned inheritance tax
only becomes due if and when a property is sold. Is this correct?

 

[oilovlam]

Someone mentioned inheritance tax
only becomes due if and when a property is sold. Is this correct?

No

 

[lemonjuice]

Someone mentioned inheritance tax
only becomes due if and when a property is sold. Is this correct?

Inheritance tax only becomes due, on my understanding at least after a death. If the person is still alive it's Capital Gains Tax.

Correct myself again back to a 3 year exemption according to the government website it is still 3 years:
"If you only own one home you get relief for the last 36 months before you sold your home if any of the following apply:
you’re disabled
you’re in long-term residential care"
So long term care is still the 3 year exemption.
K

https://www.gov.uk/tax-sell-home/absence-from-home

Thanks for that info.


And also the point about Lettings Relief might be advantageous.

You still have to take the price it originally cost and then the price it sold for (minus certain expenses) but I believe you still get the 3 years and what is called "Private Residence Relief". There is also "Lettings Relief"

The examples here a quite easy to understand but use the normal 18 month exemption instead of the 3 years.
https://www.gov.uk/tax-sell-home/let-out-part-of-home

oilivlam's point

"You still have to take the price it originally cost....."

Surely the 'original' cost isn't what I think it means. If you bought your house in the 1960's the 'original' cost would be low and the CGT liability would be massive. I would hope the 'original' cost would be the valuation at the point the person went into care or (perhaps) 3 years after that date.

does rather negate the government's stance that 'no person will be forced to sell their home to go into care.' As looking back it would have been better to have sold the house in the first place.. Capital gains will be so excessive and by the time we've paid estate \Agents and Solicitors fees is not going to leave much in the kitty.

 

[Wheresmygin]

Thank you everyone

Thanks very much for all the responses. It is very helpful.
MiL left her residence in March and went into a care home in April last year. We put the house on the market straight away as we knew she did not have funds to cover her care otherwise. It only sold last November and she got the funds in December.

Wheresmygin x

 

[Wheresmygin]

lemonjuice, it sounds like your situation is a little more complicated than mine, but it sounds like you're getting good information here.
Hope you get it sorted in the best way possible for your loved one.
Wheresmygin x

 

[Pete R]

If that is correct then PERHAPS the house should be sold BEFORE the person goes into care. Then buy an identical house (for the same money). When the person goes into care the new house can be rented out. When the house becomes liable for CGT the 'original' price paid will the price you paid for the new house. Seems crazy to me....but if it was allowed then it would avoid a lot of potential CGT (assuming that the first house was owned for a long time). Obviously there will be a lot of estate agent fees to pay...but perhaps there are ways to reduce them.

I do think you are over complicating things here. For someone who has lived in their own home all their life & then needs to go into care the likelihood of them ever paying CGT is minimal. I have just worked out my Mom's and she would have to live around another 7-10 years before any CGT was levied if the house was sold. Her current gain is £118,000 but that all gets swallowed up by the allowances.

Agents fees/stamp duty costs on both sales are allowed.

I would check first what the term 'original' value means before doing the above.

You can by going to the government pages here.....
https://www.gov.uk/tax-sell-property/work-out-your-gain


"Your gain is usually the difference between what you paid for your property and the amount you got when you sold (or ‘disposed of’) it."

 

[Pete R]

........As looking back it would have been better to have sold the house in the first place.. Capital gains will be so excessive and by the time we've paid estate \Agents and Solicitors fees is not going to leave much in the kitty.

The agents/solicitors/stamp duty on both sales is deducted from any gain.

Have a go at this calculator it may help you get a rough idea.
https://www.tax.service.gov.uk/calculate-your-capital-gains/resident/properties/

It first works out the gain (difference between buying/selling) then goes into residence discount - for that amount you divide the number of years resident by the number of year owned and multiply by the gain. The letting one is the same, years divided by owned, multiplied by gain.

Hope it helps.

 

[lemonjuice]

The agents/solicitors/stamp duty on both sales is deducted from any gain.

Have a go at this calculator it may help you get a rough idea.
https://www.tax.service.gov.uk/calculate-your-capital-gains/resident/properties/

It first works out the gain (difference between buying/selling) then goes into residence discount - for that amount you divide the number of years resident by the number of year owned and multiply by the gain. The letting one is the same, years divided by owned, multiplied by gain.

Hope it helps.

Still got to wade through that mountain of paperwork, but yes I'm sure that will help. The tenant still has some time to run in the agreement and as I've seen with the other properties in her cul-de-sac, this time of year is just starting to be the best time to get a sale.
If only one realised at the beginning how complicated this was all going to get.

 

[jugglingmum]

"Your gain is usually the difference between what you paid for your property and the amount you got when you sold (or ‘disposed of’) it."

There is an important bit missed out of this, if the house was owned before March 82, the March 82 value if higher should be substituted.

Then this gives the basic gain, ant this is then spread over the number of years.

So bought in 67 £5k, value in 82 £50k sold 17 £350k - rough figures - may not be valid

Gain is £300k which is £6,000 per year

Moved out in 2012 -and let for 5 years

so 45 years for PPR - gives £270k exempt on this

Last 3 years exempt as went straight into care £18k exempt

Leaves a gain of £12k

Less £40k lettings relief means no gain.

If the house had been empty, so no letting relief the there is an annual exemption of £11,100 so there would be a gain of £900.