I wish to sell an investment property that my late wife acquired from a trust in 1987. She gave me a 50% share in 2000, and I inherited the other 50% share on her death in 2011. Subsequently, I remarried and I gave my current wife a 50% share in 2014. Please confirm the basis for capital gains tax (CGT) on this property, and comment on a couple of ideas for possibly mitigating the large CGT liability if/when we sell it: (1) Is the acquisition value for CGT purposes equal to 50% of the value at which my late wife acquired it, plus 50% of the value in 2011 when I inherited? Presumably, this is divided equally between me and my current wife? (2) If we agree a lease option for a buyer, whereby the property is leased to them and they have options (but not an obligation) to buy shares of the property over a few years, will CGT be assessed per share in each tax year that they take up the options, so we take advantage of our CGT allowance and lower rate band over several years? (3) If we wait several years to sell, and in the meantime purchase a short lease of another property to expire in the year we sell this property, will this produce a loss to offset the gain? (I think the answer is not much, as the short lease property would be a wasting asset so most of its purchase cost would be offset against income rather than capital gains – but please confirm).
Arthur Weller replies:
When your late wife transferred 50% of the property to you in 2000, your base cost was half its value in 1987. When you inherited the other 50% in 2011, your base cost for this 50% was its probate value in 2011. Let's say the property value in 1987 was £100,000, and in 2011 was £300,000. So your total base cost for this property is £50,000 + £150,000 = £200,000. When you remarried and gifted 50% to your wife, the base cost of your share went down to £100,000, and the base cost of your wife's share became £100,000. If you dispose of the property in stages, a bit each year, you are correct that you will both have the CGT annual exemption each year to set off against the capital gain (subject to future CGT rules.) If you purchase the short lease of another property, and allow the lease to run its course until it expires, this will not produce an allowable capital loss, because the wasting asset rules reduce the allowable expenditure to nil. See HMRC’s Capital Gains manual.