Help: How can we mitigate CGT on 2nd Property Sale?

Streaky68

Hi, I'm looking for some assistance regarding CGT.

Background
Myself and my wife intend to sell 2 properties. One is our main residence which we have lived in for the last 5 years and the other is my now wife's house that she has been renting out for approx. the last 5 years. Our main residence is in my name only.

The rental house is only in the name of my wife and was purchased for £102,000 approx. 10 years ago. We expect to sell for £135,000. My understanding is that we can subtract home improvement costs and the legal fees for the original house purchase which would leave CGT payable on £30,000 before the annual allowance of £10,600 for my wife.

I've been quoted £720 by a solicitor to transfer title deeds to joint names for my wife's house.

Assuming we transfer the title deeds to joint names will the CGT exemption increase to £21,200 and can we proceed with house sale as soon as this is done?

Also, what I'm not sure about is, how much CGT would we have to pay? My wife is a basic rate tax payer with income of approx. £25,000 and I'm a higher rate tax payer. Am I right in thinking that CGT would be 18% of £8,800 (£30,000 profit - £21,200 allowance) = £ 1,584 and if we left the property in my wife's name only the CGT would be £3,492 (£30,000 profit - £10,600 allowance @ 18%)

Hopefully someone can clarify. I don't want to waste money on converting title deeds to joint names unless I can definitely mitigate CGT.

Thanks in advance for any help!

CLAPTON

when did your wife actually live in the property?
when did she get married?

00ec25

do not rush to transfer it to your name as there are 2 big things you have not understood which mean the chances of her paying any meaningful amount of CGT (eg more than the solicitors costs) with such a small gain are slim:

to give the full answer you need to reply to Clapton's questions, but you have forgotten about :
a) the 3 year rule; and
b) letting relief

PS your attempt at calculating the amount you'd pay is totally wrong, no point correcting it yet through till we sort out if any CGT is due at all

Streaky68

Hi, thanks for the replies.

My wife bought the house in September 2003 and lived in it until February 2008 (when she moved in with me).

We got married on 13/06/2011.

Not hugely surprised that my calcs are nonsense and welcome being corrected by the experts!

Regards,
Streaky68

jamesd

Without checking the actual rules again (so accept corrections and revised calculations from others!) the initial CGT liability would be about (10 total years - 5 years living there - 3 years of extra PPR relief) / 10 total years. So that very rough calculation comes to just one fifth of the gain before any CGT annual allowance is used. Then letting relief for a place that has been a PPR will eliminate the remaining gain and any use of the CGT allowance.

So even a very rough calculation suggests that she will have no CGT to pay and there is no need to transfer the property.

See the HMRC example letting relief calculation in CG64737 and use exact calculations for the years, not just the rough approximations I used.

00ec25

as James D says, no CGT to pay

the fact you never lived in it yourself and married after she moved out would mean if you transferred half to your name now all you would have done is she would lose half of her available PPR exemption and actually make the situation worse!

Streaky68

Hi Jamesd, thanks for the prompt reply.

Based on the link you sent me new calculation is:
54 months (Sept 2003 to August 2004) where my wife lived in the property plus the final 36 months = 90 months.

Total period for which property owned (assuming sale in June 2013) = 119 months.

Assuming gain (after purchase price legals etc. and home improvements) of £30,000, the CGT would be calculated on 29/119 x £30,000 = £7,310. As this is less than my wife's personal allowance of £10,600 there would be NO capital gains tax payable!

Hopefully one of the experts can come on here and confirm or put me right!

If no CGT is payable do we still need to notify HMRC of the sale and if so, what's the best way to do this?

Thanks again for all assistance. Feels like I could be saving £720 that I was about to pay to get title deeds altered to joint names!

00ec25

Streaky68 wrote: »

If no CGT is payable do we still need to notify HMRC of the sale and if so, what's the best way to do this?

Unless your wife already has to do a SA return then NO she does not need to report her sale because there is no tax to pay

correct calculation

ownership period 119 months. Gross Gain 30,000

private resident relief amount
period of occupation plus final 36 months = 30k x 90/119= 22,689

less letting relief which is LOWER of:
a) PRR £22,689
b) gain in let period 30k x (119-90)/119= 7,311
c) maximum amount allowed 40,000

Taxable net gain = gross gain - PRR - lettings
30,000 - 22,689 - 7,311 = 0
No taxable gain, no tax to pay, personal allowance not even touched

Streaky68

Nice one!

Really appreciate the help 00ec25!

jamesd

Do make the exact calculations after sale and keep the details and documents for at least six years, just in case HMRC comes asking later. They are paying some increased attention to let properties so might ask at some point.

jimmo

jamesd wrote: »

Do make the exact calculations after sale and keep the details and documents for at least six years, just in case HMRC comes asking later. They are paying some increased attention to let properties so might ask at some point.

Just to echo that, it is entirely possible for your wife to have let her property for 5 years without incurring any Income Tax liability on her letting income but if that is the case, HMRC intelligence gathering will reveal that your wife will have sold a property that she hasn’t lived in in recent years and are likely to ask questions.

They will be looking for potential letting income and capital gains so make sure your wife keeps her records of both.