Capital Gains Tax

stardust23

I purchased and moved into a house with my ex-girlfriend in May 1991. I lived there with her until June 1997 when we split up - she continued to live there with our 2 daughters. I moved into my brother's home.
In January 2003 I purchased a flat with my new fiancee. We married in February 2003 and I moved into the flat at that time.
In February 2008 I transferred my share in the house to my ex-girlfriend.

1) Do I pay CGT on this transfer?
2) If so, what relief can I claim on it?

fengirl_2

CGT will be due on the difference between your share of the value at June 1997 and the amount you received for your share at Feb 08. You can deduct legal fees from this gain and the first £9600 gain is exempt.
The flat you live in at present is not relevent.

CLAPTON

depending upon the numbers you may wish to get some expert advice.

CGT is based on the market value of the asset disposed of whether or not any money changes hands.
However, here its a bit difficult to value the property as clearly the market value of your share is much reduced by the fact that your ex girlfriend and children are living there.

silvercar

the calculation is actually done in months, but to simplify things I've looked at the picture in years.

The starting point is the purchase price in 1991, presumably half this is yours. The end point is the value of the half share you transferred in 2008. calculate the difference and then take off your share of the buying costs and any transfer costs. Lets call this number X.

Now look at what portion of the capital gain you would be exempt. Out of 17 years ownership you lived there for 6 years, you also get exemption for the last 3 years of ownership, so that totals 9 years. Nine-seventeeths is just over half - so you are not laible for CGT on over half of X.

Additionally, you would have a personal CGT allowance, currently £9,600, so you can subtract another £9,600 from the "just over half of X" figure.

(If your ex paid you rent on your half of the property, you could claim letting relief, worth upto £40,000, but I doubt this happened.)

CLAPTON wrote:

However, here its a bit difficult to value the property as clearly the market value of your share is much reduced by the fact that your ex girlfriend and children are living there.

This is a good point, if you can value your half at a much reduced rate because it is occupied by a non-rent paying tenant, your liablilty would be lower.

So view my initial comments as a worst case scenario.

stardust23

Thanks.
But is it correct that I only pay CGT because I subsequently purchased a second property (flat)?
If so, why can I not use, for CGT purposes, my first property (house) as my only residence, and be liable for CGT when, or if, I sell my second property (flat)?
If not, why can I not use May 1991 to February 2003 for relief purposes, as it was my only property during that period? (It would seem fairer, especially as I was continuing to pay the whole mortgage, as well as rent at my brother's).

jimmy230

stardust23 wrote: »

Thanks.
But is it correct that I only pay CGT because I subsequently purchased a second property (flat)?
If so, why can I not use, for CGT purposes, my first property (house) as my only residence, and be liable for CGT when, or if, I sell my second property (flat)?
If not, why can I not use May 1991 to February 2003 for relief purposes, as it was my only property during that period? (It would seem fairer, especially as I was continuing to pay the whole mortgage, as well as rent at my brother's).

The Principal Private Residence (PPR) exemption means that there is no CGT to pay on the disposal of a PPR. The issue here is that HMRC can require you to prove that this property was used as your PPR. Given that you say you moved into your brother's property (and presumably had all your bills etc sent there), you may have a tough time demonstrating it.

You can, however, apportion the PPR exemption to the property during the period it was used as such, i.e. 1991-1997

jimmo

PPR or Main residence Relief
The purchase of the flat has nothing to do with the Capital Gain on the house.
The relief is only available for a property for the time you lived in it (plus the last 3 years of ownership.
The time when you lived with your brother is lost time as far as PPR is concerned.
Check it all here http://www.hmrc.gov.uk/helpsheets/hs283.pdf
Silvercar’s explanation of how to calculate the amount of the Capital Gain is, I am afraid, wrong.
The transfer to your girlfriend was in February 2008 which is the Tax Year 2007/08. You therefore have to take into account indexation and taper. Don’t worry about that, just yet. One of us will do a calculation for you if you give the appropriate figures.
Far more importantly as it was a 2007/08 Capital Gain you need to notify HMRC now that you have made a Capital Gain and ask them to issue a Return form to you.
You have to declare the amount of the Gain and pay the appropriate tax by 31/1/09. If you don’t arrange for the issue of the Return now you will really find yourself pushed later on.
What you also need to address now is the market value of what you transferred to your ex-girlfriend. The analogy to a tenant paying no rent is pretty useful in everyday language but it your case you can be more precise. You have disposed of your half share interest in the property which is occupied by the other half share owner (and her children).
The open market value of that half share interest is a question of how much an investor would be prepared to pay you for your interest with little or no prospect of being able to move in and not much prospect of being able to buy the other half.
You now have a bit of a balancing act to look at. It is primarily your responsibility to determine what the open market value of your interest was. Try approaching a local estate agent. I fear that they will want to charge you professional fees for doing this and it may be not worth it.
You can ask HMRC for a Post Transaction Valuation. However, like all things self assessment you have to propose your own valuation figure for them to consider and provide a Capital Gains Computation. The other problem is that if you provide a higher valuation than the true worth they are likely to accept.
Now you have to consider the tax at risk. Bearing in mind that a significant amount of the gain will be covered by PPR relief all this effort could save you a bundle but it could be a waste of time.
Tell us how much you and your ex paid for the house in May 1991 and what the whole house was worth in February 2008. A bit of number crunching could well point to the best way forward.
Here is a link to the Post Transaction Valuation Request form.
http://www.hmrc.gov.uk/forms/cg34.pdf
I would suggest you don’t use it just yet but if you are uncomfortable publishing actual figures here you might find it useful later.
Don’t forget. First priority is to inform HMRC that you have made a Capital Gain in 2007/08 which may be liable to Tax and ask them to send you the appropriate Return.

stardust23

Thanks, Jimmo, that is a great post.

Do I have to complete the "Post Transaction Valuation" form for HMRC? I was just going to fill in the details (once finalised) into the online HMRC Self-Assessment system - would that be okay?

Anyway, the figures are :-

May 1991: Purchase price - £92,000
Feb 2008: Market valuation by estate agent - £245,000

Of course, the valuation was made on what the price would be if the house was sold outright and not, as has been mentioned, the valuation of the "property which is occupied by the other half share owner (and her children)".

jimmo

Here is a full calculation using 2 disposal values. I always have trouble with posting these so I’ll post an explanation after I see what this looks like on here.

Feb-08Disposal£122,500£100,000
May-91Acquisition£46,000£46,000
Unindexed gain£76,500£54,000
Indexation0.218on 46000£10,028£10,028
Indexed gain£66,472£43,972
Period of ownershipMay 91 to Feb 08 201 201
Exempt periodMay 91 toJun 97 73 73
Final 3 years of ownership36 36
Total exempt period109 109
Exempt gain"68972*109/201 £36,047 £23,846
Non exempt gain£30,425 £20,126
Tapered Gain60% £18,255 £12,076
Personal allowance9200 9200
Amount chargeable to tax£9,055 £2,876
Tax @ 22% £1,992.10 £632.70

jimmo

I do these calculations on a spread sheet but I am not clever enough to keep the columns in tact when pasting here.
However hopefully you can follow.
I suggest you print it off and then copy the figures into a spreadsheet yourself where, with a bit of patience you should be able to put descriptions in one column and then put in 2 columns of results.
The first column shows a disposal value of £122,500, half the value of the house with vacant possession at the date of transfer. The second uses a disposal value of £100,000, just to illustrate the possible difference.
I reckon that if the disposal value is less than £89,500 you will end up paying no tax.
Now we come to the tricky bits.
If you simply complete your Return making the Capital Gains computation based on a disposal value (as you have to) there is a very high risk that HMRC will “Enquire” into the Return. If the enquiry establishes that the valuation used was incorrect you will have to pay additional tax and interest. You may also be charged a penalty.
If the valuation used was simply your own opinion, or you failed to ask your professional valuer for the correct valuation then the chances of a penalty are very significant
If there is a difference of professional opinions between your valuer and the District Valuer then a penalty is much less likely.
Now, you are not obliged to request a Post Transaction Valuation but if you do so, the general idea is that the District Valuer may well be able to agree the correct valuation before you have to complete your Return. If you follow this method there is actually no need to obtain a professional valuation. You can submit your personal opinion of the value without fear of recriminations as far as penalties are concerned.
Now its over to you.
If you can follow the calculations you can tweak them to take account of your share of any purchase costs and the legal costs of the transfer.
You can also tweak them for different disposal values and really have a good idea of the possible tax bill.
Bearing that in mind you really have to decide whether to pay a professional valuer to handle the valuation and any negotiations with the District Valuer.
You can also ask for a Post Transaction Valuation yourself. Then when you get the District Valuer’s opinion you will have all the ammunition to consider whether the resultant tax bill is acceptable, whether to negotiate yourself with the District Valuer or to bring in your own professional valuer at that stage.
Now for the personal opinion bit. I would go for a Post Transaction Valuation and propose a disposal value of £89,500 simply because that is the highest valuation that produces no tax. However a significant part of my confidence in doing that is my self belief of my ability to handle the figures and that I was on first name terms with quite a lot of District Valuers.
I think it is the best option for you if you can handle it.
Phew! I need a drink.
Any questions I will answer some time after I sober up.

stardust23

Jimmo, that is terrific, thank you.

Just a few questions :-

1) Indexation of 0.218 - how is 0.218 arrived at?
2) Tapered Gain 60% - how is 60% arrived at?

3) Is it on the Post Transaction Valuation form where I mention that the valuation should take note of the "property which is occupied by the other half share owner (and her children)"?