What Tax Will My Father Pay on Property Gifted to My Mother?

Question My ageing parents have been divorced for 15 years but the house my mother has lived in for 40 years is still in their joint names. My father wishes to 'gift' his 50% share of the house to my mother so she can sell it to buy a smaller retirement home and also have some money left to live off. What are the tax implications for each party?

Arthur Weller Replies:
There could possibly have been three different reliefs that would have freed your father from capital gains tax (CGT) on the transfer of his 50% of the house to your mother, but I don't think that any of them are applicable in your circumstances:

a) Relief is available from CGT for the period following divorce, where the property is eventually transferred to the spouse remaining in it as part of the financial settlement and an election for a new qualifying residence has not been made by the spouse moving out in the meantime.

b) HMRC extra statutory concession D26 (which has now become statutory) provides that where a couple own two residences, each living in only one of them, they may exchange their interests so that each only owns one property.

c) A ‘Mesher Order’ is a Court Order made on divorce that one spouse should remain in occupation until a specified event (such as the children reaching a specified age) and in the meantime the ownership of the house is treated as though in a trust. On eventual sale of the house by the trustees the proceeds of the sale should be exempt from CGT due to principal private residence (PPR) relief.

Your father and mother are deemed to be unconnected persons after the divorce. Since your father is gifting his interest in the property to your mother, it is deemed to be a transfer at present market value (for tax purposes). Your father will have to make a calculation of the gain in the value of the property from 1982 to 2011, and the period from 1982 to 1996 (when I presume he lived in it as his PPR) plus the last three year period.

The period from 2008 to 2011 will be exempt. The intervening period (from 1996 to 2008) will be chargeable on him. He can deduct the CGT annual exemption (currently £10,600) from this (assuming he has not used it elsewhere). There is no stamp duty on your mother since this is a gift for no consideration (I assume she is not taking over any mortgage). When she sells the house to a third party, she will have no tax to pay because of PPR relief.