To sell or keep 2nd home

jimmo

holly_hobby wrote: »

Im sure if I've b&ggered up any of the calcs or missed anything, it'll be quickly pointed out.

Sorry to do this but I’m afraid you have.
A transfer between spouses can only be effective for main residence relief purposes if it takes place whilst the couple are living in the property as their main residence.
http://www.hmrc.gov.uk/manuals/cgmanual/CG64950.htm
In this case therefore if it is argued that the OP became a joint beneficial owner from the date of marriage in 2004 then he will be regarded as having purchased his share for half the original purchase price in 2004.
http://www.hmrc.gov.uk/manuals/cgmanual/CG22200.htm
The property has never, so far, been his main residence so he will not qualify for main residence relief or lettings relief.
It would seem much better at this stage not to go down the beneficial ownership route and leave it that it is his wife’s property.
As the OP is contemplating moving into the property that may provide an opportunity to transfer to joint ownership.

jimmo

chrismac1 wrote: »

No minimum time limits. See my other posts on this subject, but I think there is a stage before we look at CGT namely:

The UK needs to build over 200,000 homes per year for the next 6 or 7 years just to keep up with demand. This year will most likely be 120,000 or less. 2014 will be 140,000 tops.

No reason for any party to put the mockers on the current property boom until the summer of 2015. Banks lending again, but no sign of Carney raising rates for 6 months minimum, and possibly as much as 18.

So there is every chance for you to make another £100k over the next 2 to 3 years at what should be a low financing cost. let's call it £80k. Absolute worst case scenario is a 28% tax bill - and as per the earlier posts (I have a calculator which does both 36 and 18 month scenarios just PM me) your tax bill will likely be much less - so £22k tax on the £80k gain. You're still £58k ahead.

I'm having this sort of conversation with a few clients right now. Up here in the Lakes our market is 6 months or more behind London. Anyone who has rode out the duff markets since 2007 who does not need the cash right now is nuts to sell until the Election in my view.

And I say this as someone who much prefers investing in shares to property and has 3 blog posts as to why this is on my website!

I am no tax(or investment) planner but it strikes me that if the OP is contemplating selling his wife’s previous home in order to help in buying a new house in a better location then the gap between selling proceeds and purchase costs is likely to widen leaving them worse off in the long run.

holly_hobby

jimmo wrote: »

A transfer between spouses can only be effective for main residence relief purposes if it takes place whilst the couple are living in the property as their main residence.

In this case therefore if it is argued that the OP became a joint beneficial owner from the date of marriage in 2004 then he will be regarded as having purchased his share for half the original purchase price in 2004.

But legal ownership (ie actual legal title tsf of the asset) is not a requirement to determine whom is liable in respect of a chargeable event under CGT, as CGT liability is actually based upon beneficial ownership, which on occassion can be 2 different things ... but I know you'll already be aware of this.

Taken from HMRC ....

ownership

There are two types of ownership:
legal ownership - where the legal owner's name is usually on the ownership papers

beneficial ownership - where the person who actually benefits from the asset is the true owner

The beneficial owner is usually the one who's liable to Capital Gains Tax.

Example 1
The deeds to a second home are in the husband's name. He is the legal owner, but both he and his wife may be entitled to the profits from the sale of the house. They are therefore joint beneficial owners and jointly liable to Capital Gains Tax.

Example 2
Assets are held in a bare trust. The trustee is the legal owner. The beneficiary of the trust is the beneficial owner and is therefore the one who is liable to Capital Gains Tax.
Beneficial ownership factors

Refer HMRC CG ...

http://www.hmrc.gov.uk/manuals/cgmanual/CG70230.htm

Also ....

If HMRC form 17 had been completed and submitted this would also go to illustrate Beneficial Ownership (although we know in this case that they haven't declared any rental income !!)

HMRC view on Form 17 and BO between spouses ... HMRC states (at CG22020):
“If such a declaration has been made you should treat it as evidence of the existence of an express agreement concerning the ownership of the asset and you should follow that split in assessing the gains on the disposal of that asset.”

Of course, the Form 17 declaration is not compulsory, so the absence of a declaration is not evidence in itself that beneficial ownership is equal.

HMRC will generally assume (in the absence of Form 17) that if one spouse (or civil partner) paid for an asset and is the sole legal owner, that they are also the beneficial owner, unless there is evidence to the contrary (CG22023). The same applies if all the disposal proceeds are retained by one of them. However, HMRC also acknowledge that a presumption about beneficial ownership may be rebutted. For example, one spouse may have acquired the property as a gift to the other. In addition,

In the absence of factual evidence to determine beneficial ownership, on the disposal of an asset HMRC will seek to tax the spouse (or civil partner) with legal title, or if they have joint legal title, on a 50:50 ownership basis.

But, yes you're spot on re lettings relief, I've wrongly done the cals based on him also having qualified for PRR exemption which would permit double lettings relief (ie him and her), which he doesn't ........ so its only 1 set of lettings relief at max 40k in respect of both pre and post 6 April 14 specimen calcs - and whether being able to offset just 11k of his unused annual cgt allowance which he would have as a Beneficial Owner (if disposed tax yr 2014/15), esp given he has no lettings relief available, is actually worth the hassel reqd to prove his B.O. is quite rightly another pig in a poke altogether !

Thanks x

Holly xx

geri33

holly_hobby wrote: »

But legal ownership (ie actual legal title tsf of the asset) is not a requirement to determine whom is liable in respect of a chargeable event under CGT, as CGT liability is actually based upon beneficial ownership, which on occassion can be 2 different things ... but I know you'll already be aware of this.

Taken from HMRC ....

ownership

There are two types of ownership:
legal ownership - where the legal owner's name is usually on the ownership papers

beneficial ownership - where the person who actually benefits from the asset is the true owner

The beneficial owner is usually the one who's liable to Capital Gains Tax.

Example 1
The deeds to a second home are in the husband's name. He is the legal owner, but both he and his wife may be entitled to the profits from the sale of the house. They are therefore joint beneficial owners and jointly liable to Capital Gains Tax.

Example 2
Assets are held in a bare trust. The trustee is the legal owner. The beneficiary of the trust is the beneficial owner and is therefore the one who is liable to Capital Gains Tax.
Beneficial ownership factors

Refer HMRC CG ...

http://www.hmrc.gov.uk/manuals/cgmanual/CG70230.htm

Also ....

If HMRC form 17 had been completed and submitted this would also go to illustrate Beneficial Ownership (although we know in this case that they haven't declared any rental income !!)

HMRC view on Form 17 and BO between spouses ... HMRC states (at CG22020):
“If such a declaration has been made you should treat it as evidence of the existence of an express agreement concerning the ownership of the asset and you should follow that split in assessing the gains on the disposal of that asset.”

Of course, the Form 17 declaration is not compulsory, so the absence of a declaration is not evidence in itself that beneficial ownership is equal.

HMRC will generally assume (in the absence of Form 17) that if one spouse (or civil partner) paid for an asset and is the sole legal owner, that they are also the beneficial owner, unless there is evidence to the contrary (CG22023). The same applies if all the disposal proceeds are retained by one of them. However, HMRC also acknowledge that a presumption about beneficial ownership may be rebutted. For example, one spouse may have acquired the property as a gift to the other. In addition,

In the absence of factual evidence to determine beneficial ownership, on the disposal of an asset HMRC will seek to tax the spouse (or civil partner) with legal title, or if they have joint legal title, on a 50:50 ownership basis.

But, yes you're spot on re lettings relief, I've wrongly done the cals based on him also having qualified for PRR exemption which would permit double lettings relief (ie him and her), which he doesn't ........ so its only 1 set of lettings relief at max 40k in respect of both pre and post 6 April 14 specimen calcs - and whether being able to offset just 11k of his unused annual cgt allowance which he would have as a Beneficial Owner (if disposed tax yr 2014/15), esp given he has no lettings relief available, is actually worth the hassel reqd to prove his B.O. is quite rightly another pig in a poke altogether !

Thanks x

Holly xx

Thank you for all the responses. There's a lot to consider. So the situation is we've sold our main home, making my wife's home (with her as BO) as our main home, do we minimise CGT by living there as our main and only home for any longer duration or are we going to have to pay CGT regardless whether we're living there 6 months or 6 years? Thanks.

holly_hobby

Yes, on the property in her sole name, she is both the legal and benefical owner and you a Beneficial Owner (what consitues a B.O is noted in an earlier post).

Yes she'll be exposed to CGT for her period of absence (as she only moved out because she married you, and as this relocation wasn't connected with your employment taking you away/oseas etc its not exempt), further underpinned by the fact that the property was actually used for business purposes during the same period (ie it was let), which again exposes the period.

BUT, at least by moving back in and it reverting back to her primary residence, she will at that point crystallise her CGT exposure on future increases to its value.

Have a read on absences and CGT here... https://www.hmrc.gov.uk/manuals/cgmanual/cg65030.htm

Please verify forum tax comment with your own tax practitioner.

Hope this helps

Holly xx

geri33

holly_hobby wrote: »

Yes, on the property in her sole name, she is both the legal and benefical owner and you a Beneficial Owner (what consitues a B.O is noted in an earlier post).

Yes she'll be exposed to CGT for her period of absence (as she only moved out because she married you, and as this relocation wasn't connected with your employment taking you away/oseas etc its not exempt), further underpinned by the fact that the property was actually used for business purposes during the same period (ie it was let), which again exposes the period.

BUT, at least by moving back in and it reverting back to her primary residence, she will at that point crystallise her CGT exposure on future increases to its value.

Have a read on absences and CGT here... https://www.hmrc.gov.uk/manuals/cgmanual/cg65030.htm

Please verify forum tax comment with your own tax practitioner.

Hope this helps

Holly xx

Thank you Holly for clarifying, best wishes.

jimmo

As Holly has indicated HMRC tend to follow the line that, unless there is evidence to the contrary, beneficial ownership is effectively the same as legal ownership. So beneficial ownership arguments tend to arise from taxpayers rather than HMRC.
Yes, there is an argument that you became a joint beneficial owner of your wife’s former home when you married but, it doesn‘t seem to be in your interests to argue for that. There is a stronger argument that you became a beneficial owner when you moved in but there is also the opportunity now to change the legal ownership to joint ownership. That would be simpler than creating an argument about beneficial ownership.
So, in practice, arguments about legal and beneficial ownership can be set aside because you now have the opportunity to create the most tax efficient legal ownership that HMRC would not query.
Your big tax problem then will be that you are looking at a moving target.
The basic equation to determine the chargeable capital gain is: profit * non exempt period/ period of ownership less lettings relief.
Assuming you live in the property for at least 18 months you will crystallise the non exempt period but profit and the period of ownership remain variable.
My guess would be that, provided you are prepared to live in the property for at least 18 months, it would be wise for the legal ownership of the property to be converted to joint ownership but you would be even wiser to pay for professional advice because there are too many variables.

00ec25

jimmo wrote: »

. There is a stronger argument that you became a beneficial owner when you moved in but there is also the opportunity now to change the legal ownership to joint ownership.

how does BO work with the "rule" (?) that a married couple must have the same main residence?

Surely as soon as husband moves in he becomes a BO by default since it is automatically his main residence, or is that not the case because he is not a legal owner (unless they do change that too)?

holly_hobby

I tend to agree - whilst of course giving the greatest of respect to Jimmo and his prev occupation as a HMRC CGT inspector .

Tsf of legal title is really not an absolute necessity (esp between spouse's) for B.O purposes, where of course there is supporting evidence underpinning the B.O application (typical proof being already discussed in an earlier post) - regardless of any prior occupation of the property, although as noted, if a 2nd property with no prior occupation of the BO, they can't apply lettings relief, but application of their own unused annual CGT exemption and any prev reported CGT losses is permissible.

Moreover with respect to a legal tsf of title, if there is an OS mortgage currently in excess of 250k on the property at point of TOE (eg - if wife has prev effected equity release), then SDLT liability will also be triggered (as current SDLT nil rate threshold is capped at 125k), as the % of mge tsfd in respect of a single mge becoming joint, and is also assumed by HMRC to be 50% (given the joint and several staus of the debt), regardless AFAIK of any TIC arrangement to the contrary.

Accordingly subject to the effective consideration, any TOE consideration may need to be v carefully handled as not to trigger SDLT, which may be unnecessarily incurred in simply trying to achive PRR/CGT reliefs/exemptions which isn't actually achieved by simple legal ownership in any event.

Hope this helps

Holly xx

jimmo

00ec25 wrote: »

how does BO work with the "rule" (?) that a married couple must have the same main residence?

It doesn’t. The point I was trying to make is that whilst beneficial ownership is the true test HMRC will always start with the assumption that legal ownership is an indicator of beneficial ownership unless there is evidence to the contrary.
Therefore if it can be achieved cheaply enough, it would be good tactics to convert to joint legal ownership now, whilst the couple are living in the property.
If the legal ownership is changed then when the property is sold the information that HMRC gathers on property sales will be in joint names and easily compared to the respective Tax Returns and HMRC will almost certainly accept as fact that the couple have disposed of their jointly owned property.
If the property remains in the wife’s sole legal ownership then the HMRC information and the individual Returns will be inconsistent and that greatly increases the risk of an HMRC Enquiry.
Some people are more than a little afraid of an HMRC Enquiry and would probably prefer to spend some money to minimise their risk. Others are happy to take their chances.
For what it is worth I think that, particularly now that the couple have moved into the property, an argument that the husband became a joint beneficial owner on moving in would stand scrutiny in an Enquiry but I have seen similar cases where the Enquiry has taken rather more than 2 years to reach that conclusion. So an Enquiry could take over the OP’s life for quite some time.
However in this case, we also have the issue of undeclared letting income. Admittedly without knowing the finer details of the family finances, it seems to me that it would be better for the wife to take any tax hit on the basis that she was the sole beneficial owner during the period of letting and for the couple to to share the liability for capital gains tax. However, if they rely on the beneficial ownership argument for capital gains tax it may well open an opportunity for HMRC to revisit beneficial ownership for the period of letting. That, I think is why the OP needs professional advice using what he has learned from here to judge whether an advisor knows what he is doing
Coming back to your question, beneficial ownership has nothing to do with a married couple having the same main residence.
In the tax context a residence is a place where you live. You may occupy the property as an owner, as a leaseholder or as a licensee. You just live there, but if you live in more than one property at the same time the question of which is your main residence is either a question of fact (where you spend the most time) or election.