Capital gains tax on second property

Oxid8uk

After some advice for a friend.

She owns two properties, both bought for cash in the mid 1990s.

One house has been her primary home, the second was bought for her father to live in. He paid no rent.

Sadly her father passed away earlier this year and she is now looking to sell the property.

I understand that she will be liable to pay Capital Gains Tax on this property even though she received no income from it. Is this correct?

Would she be able to transfer the house into her husbands name or sons name rather than sell it to avoid CGT or would she still have to pay it?

Thanks in advance.

00ec25

1. yes she is liable for CGT, as it was purchased after 1988 she is not able to claim dependent's relative relief so is liable for the full gain

2. as it was not let on a commercial basis she cannot claim letting relief so the only reduction she has is her personal allowance of £10,600 (plus costs of buying and selling obviously)

3. transfers are classed as "disposal events" (except for 5 below) and give rise to an immediate CGT liability as though it had been sold in reality, so you'd have to pay any CGT due when the transfer takes place so you need the cash to pay the tax without having sold the asset anyway

4. transfers between "connected persons" (ie parent to child) are allowed but the valuation of the asset must be at full open market selling price, your tax calculation cannot use a discounted value

5. NOTE - transfers between (legally married) husband and wife are exempt from CGT but if done immediately before a property is marketed for sale will, in many circumstances, result in HMRC setting aside the transfer and assessing the liability against the original owner only. To transfer between spouses it is best to do this well before any hint of a sale, eg: 1 year before you start marketing it.

Transfering part of it to your husband is a very sound tax cutting action but only if she also remains a part owner otherwise all it achieves is give him sole liability, which is the position she is already in.
transfer to son would result in a tax bill having to be paid now and leave son liable for CGT when he eventually sells it, unless son is able to move in and make it his main home from date of transfer (this also assumes son is not still a minor)

Fire_Fox

http://www.hmrc.gov.uk/cgt/

Oxid8uk

00ec25 wrote: »

1. yes she is liable for CGT, as it was purchased after 1988 she is not able to claim dependent's relative relief so is liable for the full gain

2. as it was not let on a commercial basis she cannot claim letting relief so the only reduction she has is her personal allowance of £10,600 (plus costs of buying and selling obviously)

3. transfers are classed as "disposal events" (except for 5 below) and give rise to an immediate CGT liability as though it had been sold in reality, so you'd have to pay any CGT due when the transfer takes place so you need the cash to pay the tax without having sold the asset anyway

4. transfers between "connected persons" (ie parent to child) are allowed but the valuation of the asset must be at full open market selling price, your tax calculation cannot use a discounted value

5. NOTE - transfers between (legally married) husband and wife are exempt from CGT but if done immediately before a property is marketed for sale will, in many circumstances, result in HMRC setting aside the transfer and assessing the liability against the original owner only. To transfer between spouses it is best to do this well before any hint of a sale, eg: 1 year before you start marketing it.

Transfering part of it to your husband is a very sound tax cutting action but only if she also remains a part owner otherwise all it achieves is give him sole liability, which is the position she is already in.
transfer to son would result in a tax bill having to be paid now and leave son liable for CGT when he eventually sells it, unless son is able to move in and make it his main home from date of transfer (this also assumes son is not still a minor)

Thanks 00ec25,

So what if she transferred her primary residence (which is in her sole name) to her husband and then 'lived' in the second property for 6 months/ 1 year (the second property then becoming her primary residence). Could she then sell the second property after this time and not have to pay CGT?

00ec25

Oxid8uk wrote: »

So what if she transferred her primary residence (which is in her sole name) to her husband and then 'lived' in the second property for 6 months/ 1 year (the second property then becoming her primary residence). Could she then sell the second property after this time and not have to pay CGT?

put simply - not possible

you have misunderstood how main residencne relief works - it gives exemption only for the period of occupation - she has owned it for over 15+years. living there now would only give her exemption for the period she lives in it not the full 15+ years. Anyway that is utterly irrelevant as CGT bases the test of what is the "main" residence on the quality of occupation (where are the kids at school, where does the wife/husband live/ what does the commuting journey look like, where is the social life based, where do friends expect them to be).

A married couple will struggle to show they "live" separate lives, so no she would be unlikely to be eligible for main residence if she "lives" there for 6 or 600 months ! A married couple are deemed to live together, it is a given fact in tax law that they cannot have separate primary residences at the same time - they must have the same residence together

before you ask, given how long ago she bought it, she has missed the boat to register one or the other under the "flipping" (think MPs) rules as that (in simple terms) had to be done within 2 years of buying the second property.


her options are restricted to :

A) tax law rarely rewards marriage and actively promotes poor morals, so - get a divorce Then each can own one house independently and have it as their respective main home yet continue to co-habit in reality , each hosue then is totally exempt as it is their respective main residence

OR

transfer part ownership to husband (exempt from CGT) so she and he then each get their respective personal allowance :cool:. He gets his share at her original purchase price so is subject to the same gain as her but when they sell it they get 21,200 offset not 10,600 offset

BTW Option B is one of the very few times being married is tax efficient

Oxid8uk

00ec25 wrote: »

5. NOTE - transfers between (legally married) husband and wife are exempt from CGT but if done immediately before a property is marketed for sale will, in many circumstances, result in HMRC setting aside the transfer and assessing the liability against the original owner only. To transfer between spouses it is best to do this well before any hint of a sale, eg: 1 year before you start marketing it.

Ok so I think I understand this a bit better now. It all seems so complicated!

I don't think the advice of getting a divorce would go down well though :rotfl:

Your above quote states that the liability for CGT would be on the her if the property was fully transferred to her husband and sold within a year, so if she transferred the second property into joint names with her husband would they still have to wait a year before selling, or could it be transferred into joint names and then sold in the next 3 months, for example?

00ec25

Oxid8uk wrote: »

, so if she transferred the second property into joint names with her husband would they still have to wait a year before selling, or could it be transferred into joint names and then sold in the next 3 months, for example?

it is a grey area, there is no direct legislation that any of the other accountants posting on here have provided covering this exact CGT scenario but HMRC have generic "powers" to set aside an action where, in its opinion, it is done purely for tax avoidance.

accountants posting on these baords dealing with real people have cited personal cases of such set asides being done where there is a short time gap between tarnsfer and sale. All however agree that where the gap is at least a year then no action to set aside has ever been taken by HMRC as the rules on spousal transfers are fact

if the contracts have already been exchanged on the sale then it is certainly too late, but a transfer 3 months before the property is put on the market with an estate agent may or may not just get ignored, but do it 12 months before and you are safe

if you are bored, start reading ...
http://www.hmrc.gov.uk/manuals/cgmanual/CG22200+.htm

Oxid8uk

00ec25 wrote: »

it is a grey area, there is no direct legislation that any of the other accountants posting on here have provided covering this exact CGT scenario but HMRC have generic "powers" to set aside an action where, in its opinion, it is done purely for tax avoidance.

accountants posting on these baords dealing with real people have cited personal cases of such set asides being done where there is a short time gap between tarnsfer and sale. All however agree that where the gap is at least a year then no action to set aside has ever been taken by HMRC as the rules on spousal transfers are fact

if the contracts have already been exchanged on the sale then it is certainly too late, but a transfer 3 months before the property is put on the market with an estate agent may or may not just get ignored, but do it 12 months before and you are safe

Well I'll put everything to her and let her decide how she wants to proceed.

Many thanks for all your help 00ec25 :T