My property portfolio: sell/keep & CGT

Bojangles_3

I had a plan a few years back. It was very short term - 3 years. I am now formulating a long term plan and need help.

As well as our own home - which is in my partner's name, I have 3 other properties which I let out. One of the properties is the flat we used to live in before we bought the family home. I understand that I have to sell within 3 years to avoid capital gains tax. The equity in it is about £60,000.

If I do not sell within 3 years, am I right in saying that I'd get the first £8000 allowance, then 40% relief for letting the property? This still leaves £31,200 subject to tax. There is taper relief, which I think is 5% every year. I cannot work out if I keep this property long enough - say 10 years - will I ever cancel out CGT? I think not. After 10 years, the gain may fall into lower tax bracket, but I'll still have to pay (I think, roughly £5000 on CGT). Am I at all correct, can anyone help?

If I miss this window of opportunity to sell, CGT may put me off ever selling it.

I think the property market will remain fairly stable where I am in London, so it may be worth keeping it on, but it gives me too much of a headache trying to work out whether it's the best option in the long term - say 10 years.

silvercar

The basics are right. The bit your missing is that you are exempt from CGT for the time you have lived in it plus the last three years. (Which is why people say sell within 3 years). So total ownership for 15 years having lived in it for 7, plus extra 3 exemption = CGT on 10/15 ie 2/3 of the gain. Gain is selling price less purchase price less capital costs. You can apply the tapering relief to all of that. There is a maximum value of letting relief, not sure of its value. You do get CGT allowance of £8000?

The tax is charged at your marginal tax rate.

Mrs_pbradley936

First ask yourself why you want to sell. If you are selling in order to buy another property you do not have to pay Capital Gains Tax. I know that because we were in that situation last year. My husband and I have several properties and we used to own his mothers’ place. After she died we let it out but it was too far away for us to service it – if someone not very handy had a light bulb that wanted replacing the agent would send an electrian and we would be billed. My husband bought the place about 25 years ago for £35k and it was sold for £150k so we would have had a large Capital Gains Bill, the accountant said if we bought another property we would not have to pay it. So we did.

Mrs_pbradley936

If you do not have to sell I would keep it because if you need any money and have 60k in equity you would be able to borrow from a bank. Any interest you pay back would be cheaper than paying Capital Gains Tax. BUT you can claim interest back if you borrow via a mortgage. You need an accountant and a bank account which lets you be very flexible. In your position I would have an offset mortgage linked to a mortgage and a current account (Barclays/Woolwich) have a great one. Your rents and any other incomings go into your current account and you only pay interest on the amount you are borrowing. With 3 properties say you have £1500 in from those –well that is £1500 you are not borrowing so are not paying interest on. Anyway any interest you are paying is tax deductable.

Pennywise

pbradley936 wrote:

First ask yourself why you want to sell. If you are selling in order to buy another property you do not have to pay Capital Gains Tax. I know that because we were in that situation last year. My husband and I have several properties and we used to own his mothers’ place. After she died we let it out but it was too far away for us to service it – if someone not very handy had a light bulb that wanted replacing the agent would send an electrian and we would be billed. My husband bought the place about 25 years ago for £35k and it was sold for £150k so we would have had a large Capital Gains Bill, the accountant said if we bought another property we would not have to pay it. So we did.

Unless the property was a furnished holiday let or business premises, this advice is not correct. What you are referring to is rollover relief where profit from one property can be "rolled over" into another subject to various conditions. This relief is only available for business premises - renting a dwelling house is not a business under current tax rules - so you DON'T get this relief if you sell a let dwelling house to buy another. I would very quickly see your accountant or telephone HMRev&Customs as he appears to be wrong.

skaff

Can someone confirm this for me then please? I own 3 properties. One for over 10 years, 1 for 2 years and 1 for a year. If i added together the amount of interest i have had to pay it comes to more than the rental that i have received. Does this mean i am not liable for any tax liabilities? CGT, Income Tax etc? I always thought that this was the casae but a couple of friends' comments have got me worried!

BobProperty

skaff wrote:

Can someone confirm this for me then please? I own 3 properties. One for over 10 years, 1 for 2 years and 1 for a year. If i added together the amount of interest i have had to pay it comes to more than the rental that i have received. Does this mean i am not liable for any tax liabilities? CGT, Income Tax etc? I always thought that this was the casae but a couple of friends' comments have got me worried!

If that is the case within a tax year, yes you do not pay any income tax of that category. You carry forward the loss on the rental income to the next tax year. CGT is a completely separate issue.

silvercar

mortgage interest (not any elements of capital repayment) can be set against rental income to reduce income tax liability. You can lump your total rent against your total interest as they together form your letting "business"; pprovided the same person (s) own the proerties..

CGT tax is totally different. The liability only occurs on the sale of a property. Then you are looking at the gain you have made (sale price - cost price) less certain expenses. You do get certain reliefs if you have lived in the property and for the length of time you have owned it, plus an CGT allowance.

Mrs_pbradley936

Pennywise wrote:

Unless the property was a furnished holiday let or business premises, this advice is not correct. What you are referring to is rollover relief where profit from one property can be "rolled over" into another subject to various conditions. This relief is only available for business premises - renting a dwelling house is not a business under current tax rules - so you DON'T get this relief if you sell a let dwelling house to buy another. I would very quickly see your accountant or telephone HMRev&Customs as he appears to be wrong.

Did call the accountant, was a shop (hairdressers, which mother used to run)with flat above. Sold flat and used allowance, sold shop and took advantage of roll over.

skaff

How long do you have to live in a property to gain any CGT relief? Is the relief staged depending on how long you lived in it?

Mrs_pbradley936

If it is your only home you do not have to pay Capital Gains Tax. If it is not your only property you have three years to sell the previous one before you pay any thing. There is an allowance of about £8000 per person and if you are married you can claim your spouses' allowance as well.