Calculating/Reducing capital cains tax

banana42

I am planning on selling a property I currently rent to tenants. I own a 50% stake in the property. I inherited it in 2002 and it was valued at £280k at probate, it is now worth aprox £650k.

I lived in the property for 12 months in 2002 while I renovated it. During this time it was my primary residence does this mean there will be some tax relief for this period and some time after? (I've heard the number 3 years banded about) The person who owns the other half has not lived in it.

How would I calculate CGT? Is it my share of the gain (650-280)/2 = £185k. Then divide the gain by the number of years since it was acquired £185,000 / 8years and multiply that by 4 years (8 years - 3 years allowance and 1 year living in it) ?

This would leave 92.5k minus the 10k CGT allowance and multiply the rest by 28% ? Making £23.1k for my share of the CGT

As the other person never lived in the property would their share be as simple as £185k * 18% = £33.3k ?

Are there any other ways of reducing the tax burden? How long would I have to move back into the house before I could call it my primary residence and therefore avoid paying tax once I sell it?

I've also been told that the fact its been rented out over the years means some amount would also be able to be off-set against the Capital Gains for some reason that I did not understand.

Is it also true that any money that I spent on the renovations and improvement to the property could be offset.

I currently live in a property that I part own and rent out. Does this have any bearing on the aforementioned situation?

Thanks in advance.

Elaine_Wilson

You've pretty much got it right but a bit of fine tuning is called for.

First, don't forget that the sale proceeds can be reduced by the expenses of sale, such as estate agents and solicitors fees.

Then money spent on capital improvements to the property can be added to the probate value. But not just general renovation.

Then you calculate the private residence relief which is correct as you have done it but the computation should really be done in months.

You are then entitled to lettings relief. This is the lower of -

a) the amount of the gain,
b) the amount of private residence relief, or
c) £40,000.

In your case the £40,000 limit will apply.

Then the annual allowance id deducted to get the final chargeable gain.

The other person will have a similar calculation but will not be entitled to the private residence nor the lettings relief.

The actual tax due will depend on your other income in the tax year. If you are already a higher rate taxpayer then the whole gain will be charged at 28%.

If your other income does not reach the higher rate band then you need to calculate the amount of basic rate band left. Then that amount of the gain will be charged at 18% with the rest being at 28%.

Hope that helps.

banana42

Thanks Elaine very that was very helpful.

How long would someone need to live in the house before it was classed as their primary residence?

00ec25

banana42 wrote: »

How long would someone need to live in the house before it was classed as their primary residence?

it is not defined in terms of length of time, it is a measure of how you live there, can you prove it really is your main home: do you start your commute from it, postal address, registered with GP & dentist, electoral roll, would your friends ordinarily expect to find you there if they phoned/called round, return there each evening etc etc
clearly time does add credence to the case, ie 1 year is more convincing than 6 weeks but it is not simply done on time only, you must show evidence of actually living there

(you will get CGT exemption for only the period when it was your main residence, you cannot move back in and then claim its 100% exempt for the entire time you owned it just becuase it is now your main residence, as shown in Elaine's calculation)

John_Pierpoint

Can you not elect it, just like those house flipping MP's ?
Obviously if you are employed by a firm in London and you have the choice of a PPR in Cornwall or Oxfordshire, it is going to look a bit odd if you claim to live in the West Country unless the Oxfordshire house has been rented out to someone else.
That said you could be the Devon & Cornwall representative, or you could be doing something like software from almost anywhere in the world.