avoiding capital gains tax on 2nd house

Elizabeth_T_2

I know we are liable to pay CGT. We bought a property for £60K 2 years ago, and are in the process of selling for£100k, We spent about £2K on improvements (new windows, tarting up kitchen & bathroom, new doors etc).Am i right in thinking this can be deducted from the profit, also what legal costs can be deductd, all buying and selling costs ? estate agents fees?.........and is the personal allowance £7,900, or £8,200?
The property is in joint names, and we are in the lower tax bracket.
I think we will have to pay the tax due by Jan 06, but am wondering just what it may be.......any help/suggestions appreciated please

johnllew

The CGT allowance for this tax year is £8200 each. You can set against any gain the cost of improvements (but not normal repairs/decoration), plus the costs of buying and selling as you've mentioned.

If the property sells this tax year (2004/5), you will have to notify the Revenue by the 5th October 2005 with any tax payable on the 31st January 2006.

More help in the Revenue leaflet: CGT1. Have a look at the Revenue website: http://www.inlandrevenue.gov.uk/home.htm

Stubbsy_2

Hello have been reading this thread and would just like to know if I have related the relevant advice correctly to my own situation.

My nan has lived in her current house for ~78 years, she is in the process of buying a new bungalow. Her friend is lending her some of the money to enable her to buy it outright so if she decides after 6 months/a year that she wants to move back to her family home where she has lived all her life she can.
The way that I see it is if she sells her current residence in say a year's time she will be exempt from CGT as it was here main residence up until a year before. Am I correct in thinking you have 3 years to sell it CGT free.
Ditto for if she decided to sell the property she is buying now in a years tie as it would have been her main residence for a year.

Also, does anyone know whether she would be exempt from council tax for the house that will be left unoccupied?

Would be grateful for any advice

zain

Can someone please clarify 'taper relief'? When does it kick in and how much can it save you? An example would be particularly helpful- i have searched on the inland revenue site and i don't fully understand it.
Many thnaks

MaryC

Stubbsy,

Yes you have got your nan's situation right on the CGT front.
No idea on the council tax though, ringing the local council is probably the easiest way to check?

Zain,

Taper relief is an allowance that gives you some of your gain tax free based on the length of ownership and the type of asset.

Essentially you work out your gain as usual, ie proceeds less cost (less indexation relief if owned prior to April 1998) gives the gain before taper.
For non business assets (broadly all except assets used in your trade, unquoted shares and quoted shares where you work for the co) you have to hold the asset for a minimum of three years before getting any taper relief, then you get 5% per year. If the asset was held on 17 March 1998 then you also get a 'bonus year'.

Example
House owned since 1995
Gain before taper = 100,000
Sold in August 2004
Year owned since April 1998 = 6
Add bonus year as held at 17/3/98 = 7 years

% of gain chargeable is then 75% ie 75,000
The annual exempltion is then deducted (8,200 in 2004/05) and the resulting figure is then taxed.

Hope that helps.

zain

Thanks
very clear.

walterc_2

Hi, I have a slightly different situation. I bought a flat which was my main residence.

After about 4 months I took in a lodger and continued to rent a room until I moved out when I bought a house with my wife 2 years later. (I registered for the "Rent a room scheme" on my tax return at this time)

I now rent the whole flat but am planning to sell. All being well, I will have owned the flat for approx 3.5 years by the time the sale completes.

My question is, how will CGT affect me when I sell the flat as the CGT rules seem different for Rent a room than if you have rented the whole flat. However, its not clear what happens if you have done both in the time you have owned the property.

The flat is in my name only. From earlier replies, I can see transferring the flat to shared ownership with my wife will reduce some of the CGT.

At current values, I estimate I may make as much as £60,000! (if the property market holds up).

I don't mind paying some CGT, I just want to make sure I interpret the rules correctly.

Any advice would be most welcome.

MJSW

Firstly, do not under any circumstances put the flat in joint names with your wife! From the information provided, it does not appear that your wife has ever lived in your flat. Therefore she would get no principal private residence relief at all on its sale.

Your gain should be should be fully exempt anyway. You are right that the period when you had a lodger is treated differently from when the property is fully let. Where the lodger lives with you, shares the accommodation and has meals with you etc, then that should have no effect on the relief. But once the property is fully let, it ceases to be your PPR.

However, the last 3 years of ownership always qualify if at some time the property has been your main residence. You've lived there for the first 4th months alone, and then 2 years with a lodger. Both these periods should qualify for relief. The final period when you were letting the whole flat will then be covered by the 3 year exemption. So there should be no chargeable gain at all (unless you transfer half to your wife, when her gain would be approx 30,000.)

eldreda

Hi,
I'm asking this question on behalf on my father.
When he remarried about 11 years ago he moved into his wife's house and started renting out his house, (the house had a shop and living accomodation and he rents it out as a shop + storage on the ground floor and seperate 1st floor flat).
Anyway if he now decides to sell how much CGT will he have to pay? The property is run down and he believes it to be worth around £60,000. He has owned the property for about 40 years and lived in it as his own home until 11 years ago. He doesn't own any other property as the house he lives in with his wife is in her sole name.
I believe the taper relief will kick in, but I don't really understand?
Many thanks for any help.

walterc_2

Thanks MJSW for the reply. My wife only briefly lived in the flat before we married & bought our house (with the proceeds from her flat sale). She never even got on the council tax or electoral registers.

My main concern was that there might be a minimum period of time such as 1 year that you need to be the owner/occupier without lodgers or letting for some CGT exemption, but from what I've been reading it appears the IR will be content that you've got proof of residency, ie bank statement, council tax bill, etc, and that this at least covers a few months.

Also, I wasn't sure if the fact that I had lodgers during the last three years of ownership might have negated the CGT exemption for this period.

Keeping fingers crossed.