Capital Gains Tax

DAV122

Hi everyone

I know this issue has been dealt with on many occasions, but I just want to be doubly sure in my situation.

My father owns a second 2 bed property. It is currently worth about £250k in SE London.

However, I have been planning to move in there, and rent out the remaining rooms for a year or two.

If he sells it currently he must pay capital gains tax of 18% on what he has gained.

But I have read various places that if you take up residence in a property you own for more than 1yr you don't have to pay it, provided you can prove that it was your main residence e.g. bank statements etc. Also there are some allowances if you rent out a property.

In our current situation, would we gain anything if he transferred ownership to me whilst I live in it. If I then sold it I would be liable for capital gains at an even higher rate of course, but then maybe I can transfer it back? I also have a sister and a mother who can become part owners.

I'm pretty sure the Inland Revenue wouldn't allow that, but what can we do to at least limit the capital gains my father would pay.

(and just to confirm, my father does not want to move into this property himself)



Hope that's clear


Many thanks

CLAPTON

If your father gives you the house then that is a disposal for cgt purposes so he would have to pay the tax at this point on the full market value.

Once you own it and actually live there as your principal residence, you will be just like any other owner occupier and will pay no tax when you sell.

holly_hobby

Has this alwasys been Dads 2nd residence, or did he live in it before moving out and renting ?

This is v important to establish.

CGT is due on the difference between acquistion price (or value if inheritged/gifted to him), and the market value at time of tsf to you (less permitted deductions/reliefs/etc).

Holly

DAV122

Best if I explain fully.

It was my real grandmothers house who lived with my stepgrandfather who raised my dad there. My father moved out when old enough. When his mother died in the late eighties, he inherited the house, but my stepgrandfather remained there even though he didn't own the house.

My stepgrandfather no longer lives there now, so my father is in a position to sell it. In other words, it has never been rented, and my father has not lived in it since he inherited it, so I believe there is no relief. But anything else to reduce this bill would be greatly appreciated.

Also, do these figures look right?

Property value = 250000
Value upon inheritance = 40000
Personal allowance = 10900
Improvements made = 20000
Taxable amount = 250000 - 40000 - 10900 - 20000 = 79100

Current Income 15000
Gains taxed at 18% up to 34370
Amount taxable at 18% = 34370 - 15000 = 19370
Amount taxable at 28% = 79100 - 19370 = 59730
16623
Capital gains tax = (0.18*19370) + (0.28*59370) = 3486 + 16623 = 20,109

John_Pierpoint

You won't realise it but you just might have opened a really interesting can of worms; but unfortunately for you I don't think you have.

Once upon a time, in the days when the government spent a little over 25% of the peoples money, rather than the approaching 50% spent now, it was possible to own two tax free homes.
Home one was the one in which you lived and home two was where you kept your elderly dependent relative. Just the fact that they were enjoying your property for free made them dependent.

However

I doubt that a step parent qualifies unless they adopted the children of their new spouse?

There is a cut off date for the start of this arrangement, though there just might be a few elderly people whose children still have this relief?

Someone with better knowledge than I of CGT might be able to fill in the details.

John.

PS The 18% rate for CGT applies to standard rate tax payers, the size of the capital gain might push dad into the 28% band for higher rate tax payers.


EDIT update:

Looks like "step" spouses of the blood parent are included. [cf intestacy rules]

http://www.accountingweb.co.uk/topic/tax/dependent-relatives-and-ppr-letting-relief-nichola-ross-martin

However you will note the now illegal sex discrimination in favour of a widow.

nomunnofun

Dav122 - your calulations are almost there. However, his other income is £15000 and a personal allowance of 9440 (assuming not entitled to age allowance ) is presumably available against this. This uses 5560 of the basic rate band leaving £26450 of your Capital gain chargeable at 18%. Don't forget to deduct the costs of selling the property from the proceeds.

John - I am not sure what is more depressing - the fact that I know what you mean regarding the Dependent relative additional property or the fact that it ended 25 years ago!

jimmo

John_Pierpoint wrote: »

You won't realise it but you just might have opened a really interesting can of worms; but unfortunately for you I don't think you have.

Once upon a time, in the days when the government spent a little over 25% of the peoples money, rather than the approaching 50% spent now, it was possible to own two tax free homes.
Home one was the one in which you lived and home two was where you kept your elderly dependent relative. Just the fact that they were enjoying your property for free made them dependent. of a widow.

5 April 1988 is the cut off point for Dependant Relative Relief so you need to be more precise than late eighties.

http://www.hmrc.gov.uk/manuals/cgmanual/CG65550.htm


Also it could be more important to establish whether, regardless of the date of grandmother’s death, step-grandfather had a right to occupy (life tenancy) or simply was allowed to continue living there..

If so, your father may well have acquired the property (at market value) on the date that step-grandfather moved out.

http://www.hmrc.gov.uk/manuals/cgmanual/CG37100.htm

DAV122

Firstly, his mother died in 1989 some time, so just after he cut off point.

As far as "a right to occupy (life tenancy)", that's something worth looking into.

Thanks so much. You have quite the memory

martinsurrey

DAV122 wrote: »

Best if I explain fully.

ItTaxable amount = 250000 - 40000 - 10900 - 20000 = 79100

Current Income 15000
Gains taxed at 18% up to 34370
Amount taxable at 18% = 34370 - 15000 = 19370
Amount taxable at 28% = 79100 - 19370 = 59730
16623
Capital gains tax = (0.18*19370) + (0.28*59370) = 3486 + 16623 = 20,109

hmmm 250,000 - 40,000 - 10,900 - 20000 = 179,100

so your tax calc is out by 28% of £100,000 = £28,000

so tax due = £48,109

nomunnofun

martinsurrey wrote: »

hmmm 250,000 - 40,000 - 10,900 - 20000 = 179,100

so your tax calc is out by 28% of £100,000 = £28,000

so tax due = £48,109

Well spotted indeed!

Although I make it (with reference to my previous post)

£26450 18% = £4761
£[EMAIL="152650@28%"]152650 @28%[/EMAIL] = £42742

Total - £47503.

John_Pierpoint

DAV122 wrote: »

Firstly, his mother died in 1989 some time, so just after he cut off point.

As far as "a right to occupy (life tenancy)", that's something worth looking into.

Thanks so much. You have quite the memory

What has become of stepgrandfather?
Is he still alive?
Jimmo, is quite right to query the legal arrangements (if any) behind stepgrandfather's occupation of the property, there might be an interplay between CGT and IHT and the dates could be significant, though property prices are no longer changing rapidly as they once were.

I once found myself trying to argue that a relative's home had increased by nearly 20% in a year since their departure (in a coffin), as that increase spread amongst the beneficiaries (and their spouses) now beneficially owning the property, would be free of CGT. - after a bit of haggling with what was called the district valuer in those days, we settled on 15%.

When a transfer takes place in the absence of an arms length sale, allowances have to be made for physical and legal factors:
Are there "comparables" or is it "unique"?
Was its previous value devalued because of its:
Multiple ownership?
Terms of occupation (sitting tenant etc.) ?
Any number of other legal issues (such as rights of access)?
In these situations agreeing a valuation, as at some date in the past, is more of an art than a science.

Is this property in "average" condition, or might it have gone down hill some what in the last 25 years?
When was it last decorated and updated?
Take photos to assist the "valuation" argument.

There is an amusing TV programme, where a team of 3 - 4 artisans in a van are challenged to add £15k to the valuation of a house in three days and filmed as they struggle on a tight budget to meet the deadline .