Second House Sale

stuart3kim

We bought a bungalow for my wife’s parents 3 years ago. They are now going to move in with their other daughter. We are considering letting it out or selling it. I would like to understand the Capital gains tax first. The property has increased in value by £100k in the three years. Can any one advise please?

silvercar

eek!

gnerally there will be expenses that you can use to reduce your tax bill.

The best advice would be to move into the property yourselves for a few months, declare it your principal private residence, then move. Assuming this is not possible:

Expenses allowed include legal costs, estate agents fees. Surveys, mortgage redemption and arrangement fees. Total all these and then take this amount away from the difference between the sale price and purchase price.

taper relief for three years of ownership will knock 5% off the capital gain.

then you each (you & spouse), assuming its owned jointly, get CGT allowance of £8,800 for the tax year 2006/07. Again assuming you haven't used this elsewhere.

Say your expenses total £5,000. You have a gain of £95,000, less 5% = £90,250. less 8,800 x 2 = £17,600 is £72,650. This would be taxed at 10, 20 or 40% depending whether you are non- basic, or higher rate tax payers.

So you could be looking at a tax bill of £7,265, £14,530 or £29,060 depending on your tax circumstances.

silvercar

forgot to add that, under current rules, the tax would be payable by 31 January the year after the end of the tax year that the sale took place. So sell in the next few months and you would include details on your 2006/07 tax return and pay the tax by 31/1/08. Delay the sale until after 5 April, and you move into the following tax year, giving you longer to pay and a slightly higher CGT allowance.

stuart3kim

Thanks. Can you use prevoius years CGT allowance in the calculation?

HugoSP

stuart3kim wrote:

Thanks. Can you use prevoius years CGT allowance in the calculation?

IIAC - No you can't.

The trick of moving into it for a period and calling it your PPR is a good option to explore, then move back into your own house when you sell it.

Did you buy it in the names of both you and yor partner? If so you have two CGT allowances as opposed to one.

Deduct all the costs of ownership that you can etc - go and see a good tax accountant.

david29dpo

please bear in mind that as far as the tax man is concerned, the sale takes place on exchange, not completion. so if you exchange before 5th april but complete after the 5th, the sale will be in this tax year.

thesaint

silvercar eek!

gnerally there will be expenses that you can use to reduce your tax bill.

The best advice would be to move into the property yourselves for a few months, declare it your principal private residence, then move. Assuming this is not possible:

Silvercar, you say that this is the best advice, but forgot to mention why?

deddogblues

thesaint wrote:

Silvercar, you say that this is the best advice, but forgot to mention why?

There is no CGT on your principal private residence.

silvercar

you pay no CGT on your principal private residence for the time it is your PPR and the last three years of ownership. So if you moved in now for 6 months, of three and a half years ownership you would be exempt from CGT on the final three years. this would be calculated as six-sevenths of the ownership time ie six-sevenths of the gain. So your gain would only be one-seventh of the figures I talked about earlier. This would be less than your CGT allowances and so you would pay no CGT!