Question: Discount for non-vacant possession and transfer between connected parties
My client gave 25% each in the family home to their two adult children (before I started acting) – a gift with reservation (GWR) for inheritance tax purposes (IHT), but the original gift was effective for capital gains tax ( CGT) purposes. Parent 1 then passed away and Child 1 moved into the family home. Child 2 then gifted Child 1 their quarter share (so that Parent 2 and Child 1 own 50% each and both live in the home as their main residence). The property has dropped in value since the original gift from £900,000 to £800,000. The value of the property was unascertained at Parent 1’s death as no IHT was due. My thoughts are to declare on Child 2’s tax return, ¼ value of £800,000 less 15% discount as proceeds, less ¼ value of £900,000 less 15% discount as cost. The resulting loss could only be carried forward against future gains on disposals from Child 2 to Child 1 anyway and anything other than the above seems to be overstating the loss. What are your thoughts please?
Arthur Weller replies:
Answer: It seems to me that Child 2 acquired their share at a value of £225,000 (i.e. 1/4 of £900,000) and disposed of it when it was worth £200,000 (i.e. 1/4 of £800,000), so they have made a loss of £25,000. I don't understand why you need the 15% discount. I agree that this is a 'clogged loss', and can only be used against future gains between the same connected persons, as seen in HMRC’s Capital Gains manual (see www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg14561).