Capital Gains and Private Letting Relief

andyg_prs

Hi, this link was very interesting: http://www.property-tax-portal.co.uk/taxquestion49.shtml

Can I please ask your advice on applying this info (if correct) to this circumstance.

July 2001 purchase house for £74.5k

2002 extend mortgage by £18k for improvements.

Live in house till October 2002. Rent out till March 2006 then sell.

Total mortgate on sale £85k

Net sale - £170k

Total gain - £85k.

Lived in house for 15 months. Rented for 3 years 5 months.

Following example in link there would be 51 months partial residence relief - 15 months PRR and 36 month rule. So 51 / 56. This multiplied by the gain gives £77,411 relief or CGT to be paid on £7,599.

Then relief is based on the lower of £40k, the partial residence relief (£74k) or the chargeable CGT of ~£8k.

The £8k is the lowest of the 3 values so that applies and no CGT payable.

Is that correct?

Thanks in advance!!

Hammyman

Certainly looks about right. Until I found out about this I was bricking it and wondering what tax bill I'd get in 10 years time having paid just £22k for the house we're now renting out but as we lived in it 14 years and then would have let it out for 10, it looks like the CGT will be zero as well

andyg_prs

Can anyone please confirm that the gain is calculated after the existing mortgage is paid off? Eg I bought the house for 74.5k and sold for 170k. That would be a gain of 95.5k. Would the correct figure for the gain then be 95.5k minus the outstanding mortgage, 85k leaving only 10.5k?

Here's an example, someone buys a house for 100k with a 100% mortgage, sells for 200k. If they sell, with a 100k gain in equity but 100k owing on the mortgage, what is the CGT situation?

Does money spent renovating the house count either? Eg, making it more of a total money in, total money out situation?

Yours confused!!

BitterAndTwisted

Here's an example: someone buys a family home to live in. Another person buy a house of the same value on a mortgage to let it out. Who do you think should be liable for Capital Gains Tax on selling?

silvercar

andyg_prs wrote: »

Can anyone please confirm that the gain is calculated after the existing mortgage is paid off? Eg I bought the house for 74.5k and sold for 170k. That would be a gain of 95.5k. Would the correct figure for the gain then be 95.5k minus the outstanding mortgage, 85k leaving only 10.5k?

Here's an example, someone buys a house for 100k with a 100% mortgage, sells for 200k. If they sell, with a 100k gain in equity but 100k owing on the mortgage, what is the CGT situation?

Does money spent renovating the house count either? Eg, making it more of a total money in, total money out situation?

Yours confused!!

Mortgages are irrelevant to CGT calculation!

If you bought for 74.5 and sold for 170 you have a gain of 95.5k. If some of those improvements were capital items you may be able to take them off the net gain. If they were repairs and maintenance then you can't.

Your saving grace is that you should also get letting relief as you once lived in the property as your PPR.

So your gain of 95.5 is reduced by the time it was your PPR and the last 3 years of ownership, reducing the 95.5 to under 6k. You then have a personal CGT allowance (now 10k but can't remember what it was in 2006) so no CGT to pay. So in your case you don't need the letting relief. If you did it would the lowest of the gain while it was your PPR; the gain while it was let and 40k.

One question. Why are you now doing the tax return for a sale in March 2006. 2005-06 tax return should have been submitted by January 2007!

silvercar

andyg_prs wrote: »

Can anyone please confirm that the gain is calculated after the existing mortgage is paid off? Eg I bought the house for 74.5k and sold for 170k. That would be a gain of 95.5k. Would the correct figure for the gain then be 95.5k minus the outstanding mortgage, 85k leaving only 10.5k?

Here's an example, someone buys a house for 100k with a 100% mortgage, sells for 200k. If they sell, with a 100k gain in equity but 100k owing on the mortgage, what is the CGT situation?

Does money spent renovating the house count either? Eg, making it more of a total money in, total money out situation?

Yours confused!!

Renovating counts if it is capital spending not if it is repairs and maintenance.

In your simplified example you have a gain of 100k to account for.

silvercar

The best example of private letting relief are the MPs who "flipped" the designation of one of their homes to be counted as their main residence to avail themselves of private letting relief and the "last 3 years of ownership" counting towards their PPR.

andyg_prs

Thanks for that - it makes sense. Just to make sure I understand the figures correctly, I think my 15 months living there and my last 3 years of ownership equates to 51 months of the 56 months ownership excluded so 8.5k for the gain. Then, as you say, the letting relief could be used if necessary. I didn't think (and am still not sure) that I needed to include the house sale on my return at the time as I didn't think there was any CGT to be paid. We've now confirmed (thanks for your help) that no CGT is payable. I can't remember whether the self assessement form needed these figures included, even if there was no gain.

I may be wrong, but it doesn't seem like something worth doing retrospectively if there is no gain to account for?

TIA

silvercar

andyg_prs wrote: »

Thanks for that - it makes sense. Just to make sure I understand the figures correctly, I think my 15 months living there and my last 3 years of ownership equates to 51 months of the 56 months ownership excluded so 8.5k for the gain. Then, as you say, the letting relief could be used if necessary. I didn't think (and am still not sure) that I needed to include the house sale on my return at the time as I didn't think there was any CGT to be paid. We've now confirmed (thanks for your help) that no CGT is payable. I can't remember whether the self assessement form needed these figures included, even if there was no gain.

I may be wrong, but it doesn't seem like something worth doing retrospectively if there is no gain to account for?

TIA

You would also have buying and selling costs that can be excluded.

The figures should have been included in the property section of the self assessment, even if no tax was payable. If you have submitted a return years ago, I would just keep the calculations in case the revenue ask. If you haven't yet sent in a return for that year, eg if you weren't required to do so, it may be worth notifying the revenue.

andyg_prs

Thanks, I think I submitted the returns as I had a small company at the time and had to do self-assessement. I had a rubbish 'book keeper' who had his stuff signed off by an accountant who never advised me on this stuff and didn't advise me on tax reclaim on my pension either.....I think it's all too late now.

I just found the following two links for the 05/06 return and the 'help' doc that goes with it. Having read them both I'm none the wiser. It suggests that if I dispose of a 'chargeable asset' of over 34k (not sure if mine is chargeable due to the calculations above) I need to fill in the form. But the advice goes on to state that you use the form for CGT owed or to report a loss....and it's neither of those.

Here are the links:

http://www.hmrc.gov.uk/forms/2006/sa100.pdf

and

http://www.hmrc.gov.uk/worksheets/2006/sa150.pdf

RacyRed

andyg_prs wrote: »

Thanks, I think I submitted the returns as I had a small company at the time and had to do self-assessement. I had a rubbish 'book keeper' who had his stuff signed off by an accountant who never advised me on this stuff and didn't advise me on tax reclaim on my pension either.....I think it's all too late now.

I just found the following two links for the 05/06 return and the 'help' doc that goes with it. Having read them both I'm none the wiser. It suggests that if I dispose of a 'chargeable asset' of over 34k (not sure if mine is chargeable due to the calculations above) I need to fill in the form. But the advice goes on to state that you use the form for CGT owed or to report a loss....and it's neither of those.

Here are the links:

http://www.hmrc.gov.uk/forms/2006/sa100.pdf

and

http://www.hmrc.gov.uk/worksheets/2006/sa150.pdf

If you used the book keeper and accountant to look after your company accounts and didn't specifically ask your accountant to complete personal tax returns for you, then it is unfair to hold either of them responsible for this.

You were not paying them for advice of this type. This is a personal tax issue and doesn't sound as if it is connected with your company in any way.

The capital gain should have been declared as it is a reportable chargeable gain. The fact that the tax "owed" is zero does not affect the reporting requirements. Your rental income should also have been included in the tax return, did you declare that?

Please don't tell me the rents received were included in your company accounts? If they were then that really complicates matters and you should consider consulting a chartered tax advisor without delay.

You can find a local CTA listed HERE Select general tax in the specialism menu and then add your post code to find qualified people near you. This is their busiest time of year and you may find that many are unable to take on more work until February. Those willing to take you on may ask you to pay an upfront fee deposit for any work undertaken for you. That is quite normal in January.

They will also be able to help with your pension situation if it is not already too late, which it is likely to be.