Question on CGT - I'm clueless

VT82

Hi,

I was hoping someone could explain if there are any future CGT issues in the following scenario:

My OH owns two properties:

A house with a joint mortgage/deeds with their mum, bought a long time ago, not sure for how much but maybe £50k. Mortgage now about £8k, house worth £100k. OH's mum lives there full time.

A flat bought 2.5 years ago for £125k as a repo, valued at £160k+ when it was remortgaged, but not shifting now it has been on sale for donkey's years. The mortgage is about £80k. It's classed as their main residence for council tax/electoral register purposes.

Since the flat isn't selling, we are now thinking of getting a joint mortgage to buy a house to do up and live in. It would be for maybe £145k with a mortgage of £116k. We would then spend £30-£40k doing it up, but only bringing the value up to maybe £195k - it's to get it how we want it, not as an investment particularly. The flat would be rented out.

With owning more than one house, what would be the CGT implications when it came to selling whenever it happened down the line? We don't even know which house would be sold first as there aren't plans to sell any of them, I just want to know before we buy and end up having an unavoidable obligation in the future.

I guess it only crystallises when an house is sold, and you could take money spent doing it up off any gain, but I don't know how it is calculated, how it is paid, and what implications there would be with two of the properties being in joint names?

Thanks in advance

CLAPTON

house A
is jointly owned by your OH and his mum
his mum lives there so it's her principal private residence (PPR)
OH doesn't live there
has he ever lived there?
if so for how long?
when was it bought?

Flat
have either lived there as their PPR?

VT82

It was bought in about 2000 as an ex-council house. Turns out it was bought for about £15k (has been borrowed against since). OH lived there as principal residence from then until buying the flat.

OH has had flat classed as PPR since buying it (I'm classed as living elsewhere and always have been).

Been told it is the flat which is most likely to be sold at some point in the future.

Thanks. Wouldn't know where to start looking into the rules without asking directly for advice!

CLAPTON

basically the rules are

1. the gain / profit in a property is the difference between the buying price and the selling price less certain costs

2. the gain is assumed to be equal for each year of ownership

3. if the flat is jointly owned then the gain is divided between the two people concerned

4. if the flat was sold and your OH had lived there but the mother had no then
-your OH has exemption for the period he lived there plus the last 3 years of ownership
-if the mother never lived there then she would have a cgt allowance of 10,600 and then pay cgt at either 18% or 28%



what do you mean the OH has had the flat designated as his PPR? (where you live is irrelevant for cgt purposes)

VT82

I just meant that when he bought the flat, even though he didn't move in properly, he swapped over his electoral register entry, address for car insurance purposes etc., and council tax residency to be the flat. That way the council tax bill was minimised, as both places could get the single occupancy allowance.

Really struggling to follow otherwise. Can we put it into a worked example?

House A is bought in 2000 for £15k jointly with mum. Both have as their PPR.

In 2009, Flat B is bought for £125k in sole name. This becomes OH's PPR. Ground rent/service charge is paid throughout.

In 2012, House C is bought for £145k in joint names. Becomes PPR for both of us. £40k is spent on modernising it.

1st question - would there be a CGT bill if Flat B is sold in 2013 for £160k?

2nd question - would there be a CGT bill if Flat B wasn't sold, but House C was sold in 2016 for £220k but that was just so we could buy House D?

3rd question - how are you notified of any CGT liability you have to pay?

Thanks for your help

CLAPTON

flat

period of ownership 4 years (actually you need to work it out in months

gain is 160,000 less 125,000 i.e. 35,000 less buying /selling costs as 2,000
so gain is 33,000

now as he lived there as PPR for 3 years he has exemption for first 3 years plus the last 3 years i.e. 6 years but as ownership is only 4 years that's irrelevant i.e. exemption is for the total period so NO tax

so if he sold before 2015 there would be no cgt; even after that he would have other exemptions (letting relief and cgt allowance) so in practice he could sell even after that with no tax.



the house C would be his/your PPR the whole period so no tax

VT82

Brilliant, thanks.

Just one final scenario.

Say in 2014, house E is bought for OH's mum (bought in OH's sole name, but only mum has as PPR), and house A is rented out.

In 2018 house A (still in joint names on deeds) is sold for £125k.

I'm guessing exemption for the last three years, so only 1 year in which was neither exempt, nor someone's PPR. And gain is £110k over 18 years, so £6k per year. But then divided by 2 as joint, so £3k each, which would be below de-minimis?

So in this scenario, would only be capital gains if it had been a long time after renting it out that it was sold, and the selling price was much higher than this? Or have I misunderstood?

CLAPTON

house A was bought in 2000 jointly by OH and mother
price 15k

then sold in 2018
for 125k

so period of ownership 18years

jointly owned by OH and mother
mother lived there for 14 years
OH lived there for (say) 9 years

rented for 4 years

gain is 110,000 (maybe less as you can deduct buying /selling costs)

each person is treated separately

-mother PPR for for 14 years plus last 3 years so has exemption for 17 years
so exempt for 17/18 of 55,000 ie. exempt for 51,944
and has letting relief for 1 year
so basically is totally exempt with NO tax to pay

-OH
gain is 55,000 (half the full gain)
he has exemption for 9 years occupancy and last 3 years so 12years

so he has exemption for 12/18 x 55000 = 36,667

so net gain is 18,333
he has letting relief for 1 year has further exemption of 1/18 of 55,000 = 3055

so exemption in total of 39722

so net gain is now 15,277

OH has cgt allowance of 10,600
so he pays tax on 5,217
at either 18% or 28% i.e. pays between £939 and £1,460



note that the exemption period calculation should really be carried out in months and not years but the answer will be similar.

VT82

Does CGT tax apply even if you only have two properties? I thought it was buying a third one that meant selling your next one would have issues. And therefore OH's mum would be exempt regardless of any other exemptions?

Only heard this anecdotally so could have misunderstood.

CLAPTON

only your principal private residence is exempt from cgt; and you can only have one PPR at any one time.
The PPR is the house you actually live in; all the other properties are liable for cgt even if in practice there is nothing to pay.

your mother wouldn't be exempt in the circumstance you described in post number 7 for house A; it's just that the allowance mean she pays no tax.

Once your mother moves into house E (owned by OH) she doesn't have a PPR as that only applies to houses you own and live in.