Forums / Getting Technical / Legal & Accounting / CGT on property left to relatives in England

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  • Profile photo of RosettaRosetta
    Participant
    @rosetta
    Join Date: 2019
    Post Count: 5

    Hello all, we have several investment properties acquired over 20 years. I thought I was a bit of an expert on matters relating to property. I actually owned my own real estate business up to a few years ago.Today my accountant answered a few queries and in one he stated that depreciation claimed on investment property is deducted from the cost base.Thereby increasing the CGT.

    To be honest I was flabbergasted, I have read and studied most aspects of property investing and considering I was in the business I actually thought he was crazy.

    Apparently this is correct. I checked on the ATO website, I understand how CGT is calculated. We have sold several older properties over the years and this has never arisen. I assume that our old accountant was not claiming depreciation. How could I have not known about this before depreciation on sale before?

    Now I am very concerned as we have several children many still in the UK and my Australian daughter is the executor of our will. I was assuming that all the properties including our PPOR would be sold,I hope I am correct in assuming there will be no CGT on this house?

    I have not been able to ascertain if the beneficiaries will have to pay death duty in the uk? Perhaps someone would be kind enough to answer this.

    But the CGT bill will be staggering. Surely there must be some way round this. So many questions here, I apologise, but have just come across this forum tonight and it is a wealth of great information.

    I actually feel very foolish not to have known this before

    Thank you all in advance

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    It depends. Generally the main residence can be sold tax free up to 2 years after death. But not all main residences are CGT free – over 2 hectares, run a business from there etc.

    get some legal advice about minimising taxes. One way may be thru a testamentary discretionary trust.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of RosettaRosetta
    Participant
    @rosetta
    Join Date: 2019
    Post Count: 5

    Dear Terry,

    I had wondered about a trust, but understood that there were great costs involved. On he other hand if it is a solution to the CGT problem, it may be worth looking into further. I will have a chat to our accountant about it. Thank you.
    I am hoping that perhaps someone has some guidance regarding the assets be it either property or proceeds from the sale of properties which our children in the UK will be beneficiaries. I am concerned that there may be tax implications eg either death duties or CGT.
    I have searched the Inland Revenue and many other sites for information to no avail.
    Another thing which we discovered, we were intending to buy a small property in the UK for our own holiday use. At the last minute I discovered that if we own or even rent anything over there as dual citizens British and Australian we would become UK domiciled for tax purposes. Which would mean or world wide assets would come under fire from the Inland Revenue for death duties etc. I asked my accountant and he actually said he had never heard f such a thing and that many of his clients who migrated from the UK had since bought a property back there for the same reason. So we reluctantly decided we could not take the risk. This could be information that may interest others in a similar situation.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    A will incorporating a testamentary discretionary trust, or multiple trusts, will cost about $3k to draw up, but the tax savings should be multiples of this, especially if there are non-resident beneficiaries. It might even help with UK inheritance taxes. My understanding of UK inheritance taxes, which is probably wrong, is that it is based on the value of the estate at probate. But probate will be applied for in Australia probably thus bypassing this. If you do have UK assets you could do one wills, making sure one doesn’t cancel the other, so that the UK probate size will be minimised.
    You should be seeking advice from a lawyer admitted in the UK – there should be some of these in Australia.

    There are other strategies to consider such as triggering a CGT event now, and plan to reduce it. Or you could move into the one with the largest capital gains liability so that when you die the CGT liability on this one will be extinguished and the former main residence’s CGT will be minimal.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of RosettaRosetta
    Participant
    @rosetta
    Join Date: 2019
    Post Count: 5

    Hi Terry,
    Thank you for your kind advice.The first paragraph, although somewhat beyond my comprehension at the moment, sounds like a sound plan.

    I am a little confused by this sentence “There are other strategies to consider such as triggering a CGT event now, and plan to reduce it” Perhaps you could clarify this for me please

    Our PPOR is the most valuable asset which we have.So we plan to update this property, thereby increasing its value, hopefully.

    At present we have a will in Australia, we have no UK assets and my Australian daughter is the executor, but the more I think about it, this may prove too onerous for her.

    My husband says we will be dead so he is not concerned, but I would prefer to try and help the kids to receive as much as possible.

    I obviously need to engage someone as you suggested as we also have a super fund which is not very large, but ut has not been mentioned in the will

    • This reply was modified 6 months, 2 weeks ago by Profile photo of Rosetta Rosetta.
    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    Hi Rosetta

    am a little confused by this sentence “There are other strategies to consider such as triggering a CGT event now, and plan to reduce it” Perhaps you could clarify this for me please

    As an example say you have a house with a $400,000 potential capital gain. You could sell 50% of it to your spouse, meaning a $200,0000 gain is triggered for you. This becomes a $100,000 gain after the 50% discount. You then prepay interest on other loans which potentially wipes out most of the tax, potentially all of it. You then leave the property to your heirs with most of the tax wiped out.

    Keep in mind i just made up the numbers but these are the sorts of strategies you can implement now.

    If you have any capital losses, or assets that have dropped in value, these can be sold in the same year as a gain and cancel out any tax potentially.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of RosettaRosetta
    Participant
    @rosetta
    Join Date: 2019
    Post Count: 5

    Hi Terry,

    Thanks for the explanation. My aged brain takes longer to engage nowadays. It will take a bit of working out for me.

    Thanks once again.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,173

    And don’t forget that both members of a couple are unlikely to die at the same time, unless they travel on malaysian airlines perhaps. So it is likely one of the spouses will inherit their spouse’s assets first. This allows for further planning opportunities, though you need to plan ahead as wills cannot be changed once capacity is lost.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of RosettaRosetta
    Participant
    @rosetta
    Join Date: 2019
    Post Count: 5

    Lol, I think perhaps my brain capacity is pretty lost as I still cannot get my head round this scenario :)

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