CGT on a rental property & marriage

SaraCoo

My husband and I married last month and we're now starting to think about what to do with his house which is currently rented out.

He bought it for about £80,000 eight years ago and has paid off the mortgage on it. He lived in it up until 2 years ago when we bought another house together and it has been rented out ever since (minus a few months when he tried to sell it). We hope that it would be worth at least 160000 if he were to sell it in the future.

He is a higher rate tax payer and I am not currently working (and have no plans to do so in the near future). I understand that he could transfer the house to me and that I might be liable for CGT in the future but I can't work out how much CGT would be due at that time and whether the tax we'd be saving by having the rental income as MY income would be wiped out by the CGT in the future.

Can anyone help shed any light on this?
(Thanks too if you got to the end of this long post!)

CLAPTON

His period of residence (PPR)is very valuable and is not transferrable to you
so of the gross gain (i.e. difference between selling and buying less a few costs)
is discounted by
a. the period he was residence plus the last three years
b. letting relief : the lesser of the period of letting, the PPR or £40,000

whereas you will get none fo those
-there is also a cgt allowance of 10,100


as far as the rent income is concerned ..do you have a mortgage on your home and are you offsetting the interest against the rental income?
who owns the home and the mortgage?

SaraCoo

We do have a mortgage on our home (which we own jointly and the mortgage is in both names although only he pays it) which we are offsetting the interest on it against the rental income. This was fine for 2008-2009 but we're hardly paying any interest now as we're on a tracker from 2 years ago so in future years he'll be paying much more tax.
I'm sure they'll get us whichever way we go!

CLAPTON

SaraCoo wrote: »

We do have a mortgage on our home (which we own jointly and the mortgage is in both names although only he pays it) which we are offsetting the interest on it against the rental income. This was fine for 2008-2009 but we're hardly paying any interest now as we're on a tracker from 2 years ago so in future years he'll be paying much more tax.
I'm sure they'll get us whichever way we go!

It always assumes that it would seem that people would prefer lower capital gains so they pay less cg tax even though they themselves would be much much worse off (and did little or nothing to earn cg )
and would prefer higher mortgage interest rates so they can offset more tax against the rental income even when they will be much worse off overall

but that's just life.

KPR11

It will all depend on how much the net rental income is and how far into the future that you are intending to sell it.

If you keep the house under his name then he would be able to claim PPR on his actual occupancy and an additional 3 years of deemed occupancy and a further 3 years of deemed occupancy if you went back and lived in it before selling. He will also be able claim letting relief on the time that he has let out (you can not claim both deemed occupancy and letting relief at the same time)

So assuming you keep the house for another 5 years under his name and sell it for £160k (and do not go back to live in it before selling and assuming it was empty for 6 months when he was trying to sell it) then your cgt liability will be as follows:

Proceeds £160k (i am assuming there are no costs of disposal such as estate agents fee, lawyer costs etc)
Cost £80k (i've assumed there were no costs of acquisition such as estate agents fee, lawyer costs etc)
Gain £80k

Total ownership 13 years (156 months)

For PPR:
Actual occupation: 6 years (72 months)
Deemed occupation: 3 years (36 months)
Total occupation: 9 years (108 months)

PPR relief: 108 / 156 * 80k = £55,384

Gain after PPR = 80k - 55,384 = £24,616

Letting relief (relief period 6.5 years let out less 3 years deemed occupation = 3.5 years) will be lower of:
1. £40,000
2. £55,384
3. Letting relief = 42 / 156 *80k = £21,538

So gain chargeable to CGT:

Gain after PPR: £24,616
Letting relief: (£21,538)
Eventual gain: £3,078

Assuming he does not make any other capital disposals during the tax year then this gain will be covered by his annual exemption of £10,100 (assuming the current rate is still in place)

so no cgt due on your hubby!

If he transfers the property to your name then your gain will be £80k. Assuming you do not make any other capital disposal during the year of disposal then your net gain will be:

Gain on sale £80k
AE £10k
Net gain £70k

CGT due at 18% = 70,000 * 0.18 = £12,600

Now assuming the net rental income (i.e. your profits so to speak)for your property is £6,500 pa (and remains the same for 5 yrs) and the same assumption as above is made that you sell it for 160k after 5 years then:

If hubby owns it:

Income tax due per year = 0.4 * 6,500 = £2,600 (for 5 years this amounts to £13,000)

If you own it:
Net rental £6,500
Personal allowance: £6,500 (I know the actual amount is £6,475)
Amount subject to IT: £0

If the gain was significantly higher and the rental income high then I would recommend going for it but I do not think that it is worth it. Now you need to make a decision as to whether you want to transfer it or not.

Please note: though I have tried to be as accurate as possible. these calculations are based on a lot of assumptions and have been hastily done (and may contain errors) and are based on my understanding of the current legislation - this may no longer be the case. The legislation may change in the future. Please seek professional guidance from your accountant and think things through before making a decision

Hope it helps.

KPR

KPR11

Hi Jimmo,

I will try to answer your question here as best as I can and then come over to the other thread and have a look
First,

jimmo wrote: »

KPR11
Can I pick your brains on a couple of points?
　
“Letting relief (relief period 6.5 years let out less 3 years deemed occupation = 3.5 years)”
This point came up a short time ago and it appears to me to be a new approach. Please see this thread http://forums.moneysavingexpert.com/showthread.html?t=2247939&highlight=
Is it new? If so do you know when the legislation changed?

This has been available for a while and continues to be available as far as I recall (The statutory reference for this would be Taxation of Chargeable Gains Act 1992 [TCGA92] s223(4)). I am certain this is valid but have not got my Tolleys but will check it up tomorrow.

The leg essentially says that letting relief is the lowest of:
1. £40k
2. PPR relief
3. Gain attributable to period let (excluding deemed occupation included in PPR)

jimmo wrote: »

KPR11
“a further 3 years of deemed occupancy if you went back and lived in it before selling.”
Are you referring to periods of absence or something else?
Neither point seems particularly important to the OP but I would appreciate your views.

I am indeed referring to periods of absence. As everyone knows, the leg allows the owner the last 3 years as deemed occupation regardless of whether the owner has occupied it or not.

However, the leg also allows you the following relief provided the absence is both preceded and followed by a period of actual occupation:

1. 3 years for any reason (you could go away to travel the world, be in prison etc)
2. 4 years whilst working in the UK (so say you normally live in Scotland and get transferred to London for work)
3. Any period spent working abroad

As such, the OP could get a further 3 years PPR (under any reason) if he went back to live in the house

I hope this makes sense. I will check the leg tomorrow and make sure it is valid (I normally deal with corporate tax so my individual tax is quite rusty:().

Time to pop over to the other thread

KPR11

jimmo wrote: »

As regards the period of absence my understanding of it is that you can create a deemed period of occupation but not necessarily a deemed period of occupation as a main residence. That would then involve an election between the property actually occupied and the property with the deemed occupation so not that simple.
Anyway I look forward to anything you can add.

The deemed period is just added to the actual period of occupation without having to make an election (the assumption is that all this time the property has continued being your primary / main residence and have only been away because circumstances have forced you to i.e. short term work etc)

KPR11

jimmo wrote: »

OMG, you are quick at typing and posting. I can’t live with your speed but I think you are wrong on this one.
http://www.hmrc.gov.uk/manuals/cg4manual/cg65046.htm
In the OP’s circumstances if they move back in they will have had another residence available for relief.

There are two conditions which must be fulfilled before a period of absence, defined at CG65030, can qualify for relief by virtue of TCGA92/S223 (3).

• Section 223(7) defines a period of absence as a period during which the individual has no other residence eligible for relief, for the meaning of this phrase see CG65047-CG65049.

You are absolutely right, I had made an oversight and assumed that the husband moved in with the wife (as is normally the case nowadays) or and as the first condition was met as the OP's husband still elected to have his house the primary residence.

• Section 223(3) requires that both before and after the period of absence there must be a time during which the dwelling house is the individual's only or main residence. For an explanation of this condition see CG65050-CG65052.

The second condition would be irrelevant now.

Thanks for point it out Jimmo

KPR11

jimmo wrote: »

OMG, you are quick at typing and posting.

Seems like the trade-off for quick typing is a bit of accuracy! Twice I have had doh moments today!

SaraCoo

Thanks so much for your reply KPR11. It's starting to make sense now. I think it's time to draw up a spreadsheet to see how the income tax & CGT compare to each other over the next few years. I think that provided we can sell the house in the next few years we're best off keeping it in his name but that very much depends on the housing market and who knows what'll happen there.
Just a quick question: If we put the house into joint names (50/50) then that would halve the income tax paid on the rent but what would happen with the CGT- would that 50/50 too? (hope that makes sense...)

KPR11

SaraCoo wrote: »

If we put the house into joint names (50/50) then that would halve the income tax paid on the rent but what would happen with the CGT- would that 50/50 too? (hope that makes sense...)

You are very welcome.

Yes both the income tax and CGT would be 50 / 50 but as far as I am aware your husband will lose the PPR (not a 100% on this but I don't see how you would not lose it) and if you do lose the PPR and go for a half way house then you would be in a worse off situation then say him owning it outright or you owning it outright.

The reason I say it is that half will be subject to IT so using my previous calculation he would have to pay £13k / 2 = £6.5k in IT over 5 years

Both of you would be assessed on a gain of £30k [Total gain per spouse = £80k / 2 = £40k, less AE of c£10k (each)] which means that you will have CGT per spouse of £5,400 [i.e. £30k * 0.18]. Impying that total CGT = £5,400 * 2 = £10,800

Net tax payable = £6,500 + £10,800 = £17,300

You do the math as to which one is better for you

Hope that helps