‘My mum gave me her house while still living there – do I owe capital gains tax?'

Telegraph

24-06-2025

Email your tax questions to Mike: [e-mail].
Dear Mike,
I expect you will be inundated with gripes, but mine is slightly different.
In short, our mum gave her house to me and my brother but carried on living in it for a further 20 years. House prices then increased before we sold it. I told my accountant and he said we had to pay capital gains tax on the increase. I asked whether her living in it might negate the whole thing but he said HMRC would not recognise the transaction for inheritance tax, but would for capital gains tax. My mum's estate was smaller than the inheritance tax allowance.
I moved accountants a few years later and mentioned what had happened. This accountant took the view that I shouldn't have paid the capital gains tax but that I would now probably be 'out of time' to appeal. Nevertheless, he thought an argument might be made.
I appealed to HMRC and, after waiting a year, received a letter saying I was indeed out of time, at least implicitly accepting that a claim would otherwise have been accepted.
Isn't it unethical of HMRC to keep my money in this way?
– Gordon
Dear Gordon,
This is a trap which I have unfortunately seen several people fall into.
I appreciate that this was not the case for your mother but sometimes parents give their home to their adult children hoping to save on inheritance tax. This does not work because by continuing to live in the property they fall into the 'reservation of benefit rules' which means that the property remains in their estate for IHT purposes.
Unless the children are also living there, the gain has no protection as a principal private residence (PPR); capital gains tax is due on the sale price less the market value when you received it from your mother. It appears that was the advice from your first accountant.
However, as I suspect your second accountant was implying, there is another way that PPR can be available.
Where a property is held in a trust, often called a settlement, a separate exemption can be claimed if the person living in the property is entitled to do so under the terms of the trust. This is explained in the HMRC manuals here.
In normal cases with personal ownership, this relief from capital gains tax is given automatically. With a trust, however, the trustees have to make a claim to HMRC, and do so within four years from the end of the tax year of the sale. This raises two questions: was there a trust involved and, if so, was a claim for capital gains tax relief made in time?
Most of us assume that a trust only comes into existence through either a document prepared by a solicitor or under the terms of a will. However, there are more ways of creating a trust.
An 'express' trust can be created where three conditions are satisfied, as explained in the manuals here. This does not necessarily need to be in writing although where property is concerned it must be evidenced in writing.
An 'implied' trust can come into existence through the operation of established legal principles, as explained here, including who provided the funds. There have been some recent cases on the legal issues involved as summarised in the HMRC manuals here. These were not tax cases but the legal principles reviewed are nevertheless relevant.
The key issue is whether documentary evidence exists to show the background to your mother's gift of the property to you. She may, for example, have written letters to each of you explaining her plans.
I imagine that she arranged the transfer of the property to you with the help of a solicitor and you may still have the papers stored in a safe somewhere, possibly at the bank.
I realise that this was 20 years ago but the solicitors involved may have retained the relevant paperwork. Since this is essentially a legal issue, I asked Gary Rycroft, The Telegraph's consumer law columnist, for his thoughts.
He said: 'If you have evidence as to the intention by all parties involved for your mother to still live in the house after the gift, that would be useful. Also factual evidence that she paid expenses such as council tax, or that she was named as occupier on the home insurance would point to her living there with the permission of yourselves as the legal owners.'
If this hurdle could be overcome, the next issue is whether you have made a claim in time.
There are some circumstances where HMRC will relax the time limit for making claims, such as where someone works overseas and retains a property in the UK. However, the four-year time limit arises from the general rule on claims and I am not aware of any guidance to inspectors to accept late claims.
A claim is treated as made when it is received by HMRC, not when it is signed, dated or posted, as stated here. You say that HMRC took a year to respond to your letter but I am not sure whether this letter confirms when HMRC received your claim.
You have asked about the ethics of HMRC sitting on your money.
We receive many comments from readers complaining about delays in HMRC dealing with correspondence. I received a letter a few weeks ago in response to a claim I made last September, but it did at least contain an apology.
However, I do not believe that anybody at HMRC deliberately sat on your letter until it went out of time, and as long as the post was timed on arrival it would have made no difference anyway.
What I assume happened is that by the time you made your claim you were already outside the four-year window. I can understand your frustration but that is just the way the law works.
Mike Warburton was previously a tax director with accountants Grant Thornton and is now retired.
His columns should not be taken as advice, or as a personal recommendation, but as a starting point for readers to undertake their own further research.