Capital Gains Tax

cazzybabe

please can somebody try to help:
we have lived in our house for 5 1/2 years. the house is in my husbands name only. we are looking at re-mortgaging on a buy to let basis to release capital to enable us to buy (deposit + mortgage) our dream home. we would of course then look at renting our first home out, rather than rushing to sell it - possibly at a knock down price just to secure our dream. My question - when we sell our first home either in 6 months or longer would we then have to pay any capital gains taxes?
Thanking anybody in advance........
caz

o_t_e

Hi - If the property has been your husbands principle private residence for the entire period he has owned it you are entitled to PPR relief from capital gains tax - you can leave and rent the property out for up to three years without becoming subject to CGT.

Hope this helps.

cazzybabe

What does PPR mean - i'm so sorry for being thick!!
It seems then, that we can get our dream without accepting any old offer - that is right isn't it. Thank you o_t_e

pchelpman

PPR = Principle Private Residence.

As ote says you have 3 years from the date the property ceased to be your PPR during which time you can do what you like with the property. The taxman is not interested as the "last three years of ownership" of a PPR are exempt by law for Capital Gains Tax purposes.

o_t_e

Sorry - PPR=Principle Private Residense. I'm not terribly familiar with buy to let mortgages, but in principle if you can get the funds you need by that route then you need not rush to sell off your original home because of capital gains.

I'd look into the full costs associated with rental though and I think you'd also want to consider whether you will be able to find tenants who won't devalue your original home through the kind of casual damage that some tenants are prone to - people tend not to look after things that don't belong to them in my experience.

On the other hand you may want to spruce the place up before putting it on the market anyway and you could probably claim much of the associated costs as allowable expenses against your rental income.

JennyP

The allowances were pretty generous for CGT.
Basically I owned my flat for 80 months.
For the first 36 months, I was living in it so those months were CGT exempt.
The final 3 years of ownership was also exempt because the flat had been my main residence even though it wasn't when I sold it.
That left just 8 out of 80 months which were liable to CGT. But there's a rule saying you can claim a further relief of £40000 so I didn't have to pay any in the end.
The biggest hassle when I finally did sell and completed my tax return was finding out how to fill in the form !
Found this in the Telegraph ages ago which explains it all better than me:
money matters
From The Daily Telegraph - 19/11/2005 (394 words)
Property:

By Maggie Fleming

My partner bought a house in 1990 for approximately pounds 40,000. He lived there for seven years and then bought a flat, which he moved into immediately and sold six years later, making a profit of pounds 48,000. After selling the flat, he moved back to his house, which had been rented out in the meantime, and has been living there for the past two years.

I am worried about Capital Gains Tax (CGT). Should he have paid CGT on the sale of his flat? What will the Inland Revenue do if he comes clean about it now? And will he have CGT to pay if he sells his house now? It is now worth about pounds 100,000.

Maggie Fleming writes: Your partner has nothing to worry about. I'll deal with the flat first. As the flat was his main residence throughout his entire period of ownership, the gain of pounds 48,000 is completely exempt.

The house is slightly more complicated. If he sells it now, he will have owned it for a total of 15 years. In that time, he has lived in it as his only residence for periods totalling nine years. Therefore, 9/15ths of the gain is exempt for that reason. But, in addition to periods of actual occupation, the final three years of ownership are always exempt also. There is an overlap in this case, as two of the final three years are periods of actual occupation but a further one year would be allowed. Therefore a total of 10/15ths, or two thirds of the gain is exempt. Furthermore, the gain is reduced by indexation allowance and taper relief.

But, crucially, the remaining one third of the gain will also be exempt, as the house was let out as residential accommodation. Where a property which has ever been your only or main residence is let out in this way, the part of the gain that is attributable to the period of letting is also exempt, up to a maximum of pounds 40,000, provided that it is not greater than the amount of principal private residence relief already due. In your partner's case, it will all be exempt.

Maggie Fleming is a director of Isis Financial Planners and a member of the Chartered Institute of Taxation.

pchelpman

Spot on, JennyP. This is the crucial bit (if a bit confusing) ...

JennyP wrote:

Where a property which has ever been your only or main residence is let out in this way, the part of the gain that is attributable to the period of letting is also exempt, up to a maximum of ....

£40,000

OR

the amount of principal private residence relief already due.

This is a little used relief. It's not well known outside the tax profession (and sometimes not even then!!).

HLK

So, does that mean if your were to rent out you PPR for 3 years intending to sell some time after that it would be a good idea to have the property valued at this pont in time in order to correctly calculate the £4o,000 gain ?
Thanks.

Ian_W

No, it's the total gain over the time you owned it divided by the periods of relief as per Jenny P's post:

That left just 8 out of 80 months which were liable to CGT.

She owned for 80 month on total, had lived in it for 36 months and then claimed the final 36 months "residential" relief, leaving 8/80th's of her gain to count for CGT. There was then letting relief [up to £40K], taper and personal CGT allowance which wiped out any liability.

johnydeath

Great info everyone and its slowly getting understandable but still not sure how the 40k relief comes in.

My example - have owned house for 4 years cost £130k. Was going to live in it but as a member of Armed Forces got moved and had to let pending returning there at some later date. Circumstances changed again and now have left military but will not be returning to that property as it is the wrong area so will be looking to sell in 1 year.

So will have owned house 5 years (60 months), never lived in by me but always rented out minus tennant transition periods. Potential sell is for £170k (£40k profit) - will I have to pay any CGT? Does it matter what I earn? - I assume that I am exempt CGT in this instance.

If I sell for £175k (£45k profit) will I have to pay CGT? - I assume yes, taxed on £5k

If I live in it for 6 months before I sell will this have a bearing on things?

Thanks in advance.

Ian_W

Hi johny,
As I understand it the letting relief [the £40K] only applies if you qualify for residential relief [it has been your residence at some time], so forget whether your profit is £40 or £45k as you quoted above, it isn't relevent. If you do live in it for 6 months then you get the last 3 yrs exempt plus up to another £40K but you may not need to.

I believe there may be rules specifically relating to HM forces and housing but I've not been able to find them with a quick shufty on the HMRC site. Unless someone happens along with a clear answer I'd get some specialist advice, it's probably bread & butter to an accountant in one of the garrison towns. It may save you having to live there and shouldn't cost too much.