Will I pay tax on a flat bought by my parents?

Q My parents bought a flat for me to live in almost five years ago. They took out an £80,000 mortgage and put in an £8,000 deposit. The flat is now worth in the region of £130,000, with £72,000 left on the mortgage.

I now want to buy a flat, and need some of the equity in that property - does the private residence relief apply to me, as the flat was owned by my parents but lived in by me? I lived there for three years, rented it for a year or so.

Also, would me parents be able to make me a deed of gift of the equity within the flat, and if they did, would I still be liable to capital gains as I'd be investing the money gained into my new primary residence?

PB

A To answer your last question first: no, you wouldn't have to pay capital gains tax if your parents gave you a share in the flat they bought for you to live in - but they might. That's because capital gains is payable when all or part of an asset is disposed of by the person (or people) who owned the asset (your parents) rather than by the recipient.

So in your case, if your parents gave you a share in the flat, the gift would count as a disposal for the purposes of capital gains tax and so your parents might have to pay (but you wouldn't). And because they themselves never lived in the flat, they would not be able to claim private residence relief. Although you lived in the flat, private residence relief doesn't apply to you because you didn't own it.

How much capital gains tax your parents might have to pay depends on the value of the share they give you (if they decide to do this). So if they were to give you a half share in the property, the capital gains tax bill would be worked out taking the value of the share at the time the gift was made (for example, £65,000) then deducting the value when they acquired the asset (for example £44,000) and any allowable expenses - such as legal fees - involved in both acquiring and disposing of the asset. Sadly, according to the tax rules (laid out in the free booklet CGT1 Capital Gains Tax: an introduction (pdf) published by HM Revenue & Customs, you can't deduct the outstanding mortgage when calculating capital gains.