Capital Gains Tax - please help

moneypuddle

Hi

Please could someone help me with understanding Capital Gains Tax.

In Nov 2009 I was living with my parents. My then partner and I bought a home together. It was a real do-me-up job and we rennovated it slowly over a year. I never lived in the house as I stayed with my parents (It was not in a fit state to live in). My ex partner and I split up, and agreed to finish up the house, selling it in early 2011. We split the money and moved on.

I've just had a letter from HMRC saying

"Please notify us about any residential property you have sold

Dear ***

Our records show you may have sold a proprty which is liable to Capital Gains Tax. If an individual sells a property that is not their main home, and is not otherwise exempt, either in this country or abroad, they may need to pay Capital Gains Tax on the gain made from the sale. If we discover that the right amount of Capital Gains Tax has not been paid, we can charge a penalty in addition to the tax and interest that is payable. HMRC will take actions if we think individuals have not paid the right amount of tax and have notified us. As a result of this process, they could face criminal prosecution"

Can anyone shed any light?

Thanks

mrschaucer

If you never lived in the house then it wouldn't have the normal exemption from CGT as your primary residence. Remember you can set off expenses incurred in doing it up, and the buying/selling costs. You also have an annual allowance before CGT is payable.

moneypuddle

But it was the only house I owned. Does that make a difference? Its not like I owned 2 homes. The house I was staying in was my parent's house.

I never lived in the house but stayed there on occasions. Does that make any difference?

mrschaucer

You need to trawl HMRC's pages on exemption from CTG and house sales,
http://www.hmrc.gov.uk/cgt/property/sell-own-home.htm
but as far as I know, for a property to be exempt from CTG it does need to have been your home at some stage. That would entail proving that you lived there, eg changing your address with the various agencies, banks etc, getting on the electoral role there and so on. I don't think just staying there occasionally would cut it, but you need proper advice on that.
Depending how much profit you made, there might not be any CGT to pay anyway. Profit divided by two (50% share with partner?) less 50% of all the associated costs involved in getting it ready to market and buying/selling costs, and then you have your own £10,600 allowance for tax year 11-12. (How early in 2011? It might be less.)

00ec25

moneypuddle wrote: »

But it was the only house I owned. Does that make a difference? Its not like I owned 2 homes.

No - the key factor is was it your main home. It is perfectly possible to own one property and rent another with the rental property being classed as the main home leaving the owned property liable for CGT

moneypuddle wrote: »

I never lived in the house but stayed there on occasions. Does that make any difference?

Given its now sold a claim that you occasionally stayed there will fail as its obviously not your main home. You'll presumably be unable to produce any paperwork etc evidencing that you actually lived there continuously

so what you need to concentrate on is working out if you will actually pay any tax at all. There is a small risk that when you claim renovation costs HMRC will decide that your objective was to property develop and so you will be liable for Income tax not CGT. If you do manage to remain within CGT then we need some numbers to advise you further
what was the original purchase cost?
what did it sell for?
how much did you spend on renovation?

moneypuddle

Thank you for your help
what was the original purchase cost? - £165,00
what did it sell for? £227,000
how much did you spend on renovation? Approx £25,000

olias

You made £62000
minus
£25000 cost to do up
£21000 approx cgt allowance for the two of you for 1 year (assuming you haven't used it elsewhere
Fees to buy and sell?
say £1000 to buy plus £1650 Stamp duty
say £3000 to sell (solicitor and EA)
mortgage costs for the year? say £500 pm - £6000

That leaves approx £4000 to pay tax on at 18% = £720 to pay

Figures aren't exact and maths isn't my strong point, but you get the picture.
Biggest problem is I guess you haven't kept receipts for most of that £25000 cost of doing it up?

Think you need to speak to an accountant.

Olias

moneypuddle

I see - thank you Olias. Thats really appreciated and actually not so bad as I thought. Just hoping the ex hung on to some receipts

00ec25

olias wrote: »

mortgage costs for the year? say £500 pm - £6000

That leaves approx £4000 to pay tax on at 18% = £720 to pay

NO !
you cannot claim mortgage costs as part of a CGT calculation.
the Stamp duty threshold in Nov 2009 was £175,000 so he didn't pay any on purchase

assuming it was owned as joint tenants (ie 50/50) then the taxable gain would be
62,000/2 = 31,000
less the renovation cost 25,000/2 = 12,500
less the illustrated costs of buying and selling (1,000 + 3,000)/2 = 2,000
less the personal allowance (@ rate applicable in 10/11) = 10,600

taxable gain 31 - 12.5 - 2 -10.6 = 5,900
worst case scenario is all @28% (applies if your total taxable income plus this gain is >41,450
so tax payable 5,900 x 28% = £1,652

best case scenario all at 18% tax payable = £1,062

be aware that not all of the 25k may be allowable. If the works were repairs rather than improvements then they are not allowed against capital

there is still the small matter of the fact he has not declared the sale to HMRC and they have come knocking, he may therefore face penalties on top. Best to go see an accountant and deal with this openly and quickly with HMRC

olias

olias wrote: »

Figures aren't exact and maths isn't my strong point,

Think you need to speak to an accountant.

Olias

Hence my caveat...............;)

Olias