nun

To the OP. I'd ask this question over at http://uk-yankee.com in the taxes section. There are dual qualified experts over there.

carmen blue

nun - Thank you, I understand now. She would have little CGT as they only received the flat this year and they're selling it this year. There is nothing else in the father's estate really - this flat was their inheritance. So it's not as if the father would give him any more in his will.

Cook_County - yes, his dad was fully ok to give the gift. He moved into a home and knew he was never going back into his old flat. The plan was for the kids to renovate and rent it out and it would be an income for them. But they decided to put in on the market instead (mainly because my husband lives in the US and renovating, renting, etc would be too complicated). So that's how this all started this last summer. Also, they only contacted the UK accountant about UK issues - that person didn't even know my husband was a US person. BUT the solicitor did. Do you think it's worth contacting the solicitor who transferred the deeds (she's the same solicitor who's also doing this sale) and just tell her the story? My husband doesn't want to accuse her but he could gently say he was never explicitly told to get US tax advice and ask her if there is any way that gift could be undone based on those grounds.

We're talking about a potential US tax bill of $80k. They are keeping money aside should he die within 7 years. Does anyone know how that $80k could affect the UK's inheritance tax if he does die within 7 years? We have yet to understand how/if they would take US CGT paid into account. We're really hoping that would lower their UK inheritance tax bill

nun

Seriously ask this over at uk.yankee.com in the tax section.

Also if the potential US CGT bill is $80k that implies a capital gain of $80k/0.15 which is $533k which further implies a capital gain on the whole value of the house of over $1M

carmen blue

Thanks, nun. I'm a little confused. Here's how I got the figures:

The total gain (according to the IRS) is just over 550k (GBP), so my husband's half is 225k. so 15% of that (plus 5% state) is 45k (GBP), which is about $75k.

nun

OK, I thought the $80k as just your husband's potential US capital gains tax bill.
Also if the gain is 550k GBP, your husband's half is 275k GBP and 20% of that (15% CGT and 5% state tax) will be 55k GBP which is $88k.

Obviously the 550k GBP is over the 325k GBP UK inheritance tax and if your father-in-law dies within 7 years of the gift there will be inheritance tax to pay on the amount over 325k GBP. I believe that the amount is prorated according to the number of years after the gift that the death occurs (taper relief).

I don't know if CGT paid in the US can be used as a credit against UK inheritance tax, but my inclination would be that it cannot. The reason being that the taxes are different. So a worst case scenario would be US capital gains tax and state tax on the gift and UK inheritance tax on the amount of the gift above 325k GBP (reduced by taper relief) and 40% tax on the rest of the estate.

carmen blue

We finally talked to our UK solicitor about it. We really didn't want to blame her but we are very annoyed she didn't mention that he should get US tax advice. I'm pleased to report that she is looking into undoing the transfer. She is surprised to hear about our potential tax bill and knows my husband under no circumstance would have agreed to accept this gift had he been fully aware of the consequences. Hopefully she'll have good news tomorrow.

On another note, the buyer might be pulling out and there is a second buyer there but at least it means time is on our side.

ginstwin

Dont forget the exchange rate. The US cost base and subsequent gain is calculated at the time of purchase and time of sale in US dollars.

May be beneficial to you or may not depending on the rate at the time.

If you know the exact dates i can give you the exact exchange rate.