Does my dad have to pay tax on my first house?

Q Four years ago my dad helped me to buy my first house by putting his name on my mortgage. I have made all the payments. He doesn't live with me, but is a joint owner. He also gave me ?10,000 from the sale of my grandmother's house, which I used as a down payment.

I now want to have his name taken off. I'm in a much better financial position now, so there will be no problem as far as the Halifax bank is concerned.

What does concern me is that my dad might have to pay capital gains tax on his half of the increase of value - ie half of ?60,000 - whether I sell or not. Is the Inland Revenue having a laugh?

The Halifax helpline said they hadn't heard of this before and advised me to see an advisor in my branch. An IFA said I needed to check with the IR. The IR told me to speak to an IFA!

JW

A No, the Inland Revenue - or HM Revenue & Customs (HMRC) as it is now known - is not having a laugh and yes, your dad might have to pay capital gains tax.

In transferring ownership of your house to your sole name (which I assume he will do when his name is taken off the mortgage), he is making a gift to you of his share of the property.

And odd though it may seem, as far as HMRC is concerned, giving away an asset counts as a disposal for the purposes of capital gains tax in the same way as selling an asset does.

However, your dad won't have to pay tax on the whole of the gain because of the way this is worked out. Broadly, you take the value of your dad's share in the house at the date he gives it to you, then subtract the value of his share when you bought the property plus any costs he incurred - including estate agent's fees, legal costs, stamp duty - in acquiring and disposing of his share of the property.

The figure you get from doing that calculation (which gives the net gain) can then be reduced further by applying what's called "taper relief" which is available for assets owned for at least three years.

If your dad gives you his share after four complete years of ownership, only 90% of the gain is taxable, while only 85% of the gain is taxable after five years reducing to 60% after 10 years' ownership.

If, after taking taper relief into account, the figure you are left with is still more than the capital gains exempt amount of ?8,500 (in the 2005-6 tax year), capital gains tax will be payable on the amount over ?8,500 and your dad should notify his tax office of the gain.

You can get more detailed guidance on calculating capital gains tax as well as guidance on the expenses you use to reduce the gain in the HMRC's self assessment notes on capital gains from www.hmrc.gov.uk.

The notes are a bit daunting so you may find it helpful to go straight to page CGN7 where the simple guide to capital gains tax starts.