avoiding capital gains tax on 2nd house

Legacy_user

I know this question has probably been asked a million times :-/ but here is my situation.

We have a second house that we currently rent out. It was bought for £42K 3 years ago and is now worth about £92K. So there's £50K's worth of profit and £10K CGT?

My wife actually owns the house in her own right and all her mortgage correspondence already goes there. If we changes the electoral register and changed lots of other correspondence to go there, is there a realistic chance of avoiding the CGT?

She would be willing to 'actually' live there for a month or so below the sale to avoid this tax.

I'd appreciate it if anybody could let me know whether we have a chance or not.

Thank you in advance.

Otsmith

Alpam

OK we all want to save tax but sticking two fingers up at the Revenue does not help.
You could escape the majority of the tax if you were to live in the house for a period of time as your main residence. This means both of you, unless you were to genuinely seperate; you would need some reasonable excuse as to why you moved out of your present house into the previously rented one and then moved back into your former main residence.
Where any property throughout its period of ownership was occupied for a period as your only or main residence, the final 3 years of ownership will be treated as exempt from CGT. Does this begin to give you some ideas about planning and moving? Lastly, married couples, should consider putting the property into joint names before sale, this can cost between £0 - £150+ depending on your solicitor. You each have an annual exempt limit of gains you can make of £7900 so for a cost of £150 you could save between £1750 for a basic rate taxpayer and £3160 for a higher rate taxpayer

System

Hi,
I just thought I'd mention that I agree with Alpam in that a transfer so that you jointly own the property would mean that you could use both your annual exemptions and there would be no cgt for your wife to pay as it would be a no gain no loss transfer to a spouse.
Other things to consider are that the gain is also reduced by a number of reliefs such as
Indexation and taper relief and letting relief which you would also get.

johnllew

Other things to consider are that the gain is also reduced by a number of reliefs such as Indexation and taper relief and letting relief which you would also get.

Indexation ceased in April 1998, before the property was purchased.

System

John is right about the indexation. Sorry I didn't notice the bought 3 yrs ago bit

System

Hi guys, really appreciate you replying. I know it just seems like we jus want to cheat the system but it was a mjor investment for us and to give away 20% of the profit is not something (in our ignorance), that we planned on :-[

When you say "Where any property throughout its period of ownership was occupied for a period as your only or main residence, the final 3 years of ownership will be treated as exempt from CGT. ", what period of time are we talking about?

The house has been ours for 3 years but only rented out for the last 2.5 years. I think I might be able to claim the wife lived there for 6 months, or am I completely going along the wrong lines? :-/

johnllew

I think I might be able to claim the wife lived there for 6 months, or am I completely going along the wrong lines?

You can only claim that she lived there for 6 months if she did indeed live there for 6 months. Don't make anything up; get caught and the penalties could be severe.

If the property was your wife's main residence at any time during her ownership then the last 3 years of ownership will be exempt. If she only owned it for 3 years (and it was her residence at any time) then the whole of the gain will be exempt.

Fran

I know it just seems like we jus want to cheat the system ...............................................................The house has been ours for 3 years but only rented out for the last 2.5 years. I think I might be able to claim the wife lived there for 6 months, or am I completely going along the wrong lines?  :-/

It doesn't seem like you want to cheat the system, you do want to cheat it. I hope you don't get any replies that encourage you.

DiggingOut

I think CGT allowance is £8200, not £7900. So put it in joint names, and you exempt £16,400 of the gain. So now you are down to £33,600 of gains, and have eliminated 1/3 of your £10K tax completely honestly and legally.

£6700 is a lot of tax to pay, but the price of lying to avoid it is very, very high. Even if you "get away with it" you have to live with yourself. One thing you'll never get away from is your conscience.

You could actually go live in the house for six months. It might cost you in other ways, but if it is going to save £6700 in tax....

I think it helps to look at the big picture, as well. Yes, you will have to pay a lot of tax. Isn't that a great problem to have? You made £50K (£43K after tax) on an initial investment of £42K, in three years' time. Except you didn't even make an initial investment of £42K, you borrowed a lot of that. If you had a 25% deposit (about £10K), you've made a 430% after tax return on your investment.

You've come out of this phenomenally well, even after the government takes their pound of flesh. I hate CGT, I think it is a detrimental tax, but as long as it is there it is one of the costs of investing. So you live with it, and be grateful for the great return you've made on this.

System

I had the same 'problem' re: CGT and thought of all the ways to avoid (not evade) it!! The solution is to seek advice from a tax expert who will do the number crunching and will suprise you with the final 'tax to pay figure'. My £40k tax liability under CGT was considerably reduced as a result of my 'consultaion'!! (MSE, am I allowed to give the name of the tax adviser I approached??))

MaryC

Just a quick point, husbands and wives can only have the same main residence. What you cannot do is say that one residence was your wife's main residence and one was yours as you are married and the IR don't allow this.

Therefore, if you both move to the second property and it becomes your main residence for a period of time, then this will mean you can exempt the last three years of the gain.

However, it will mean a corresponding loss of relief on your other property ie. move for 6 months to property 2 will mean that 6 months of any eventual gain on property 1 is chargeable as it was not your main residence for the whole time you lived there. Probably not a huge issue as it is likely that your annual exemptions would cover this gain.

By the way, every individual has the right under law to arrange his affairs in such a way that minimises the tax he has to pay, so don't feel bad about this. Moving to the second property is legitimate as long as you actually live there. Many people would decide the upheaval is too much effort and not bother!