Second home - Capital gains tax

Seanymph

We have a second home (well OH does) - which is son lives in.

Part of our reasoning for not renting it out instead (he lives there with his g/f - quite obviously they show no signs of getting their own place!) - part of our reasoning is that we would pay CGT if we rented it out on any increase in value so it 'saves' us that money.

But I never thought to check if it does.

So does it?

CLAPTON

simply : no

You need to tell us a little more about the full circumstances but only your own home you actually live in is exempt from cgt

however there may be allowances that mean there is no tax to pay in practice

has you OH ever lived in the second property?

Seanymph

Yes, it was the family home, OH has owned it for about twenty one years.

He and I moved in together 'properly' - lock stock and barrel - a year and a half ago, and married 15 months ago.

I own this one - he moved in with me when I bought this - and his son and g/f remain in his home because they didn't want to move counties.

The property does have a mortgage on it (two actually) because we have bought a house in France with the money and then roofed a barn.

We took the decision not to rent it out (or throw out his son who is happy there!) and have consoled ourselves with the fact that with all the mortgage complications of it being rented, and the CGT we may as well let his son live in it.

Last night we talked about it and realised we had just been making assumptions.

CLAPTON

are you married?

00ec25

from the point you got married 15 months ago the place you both currently live in became his main residence as married couples must have the same residence in tax law and (normally) it is the one they actually live in

so as he remains the sole owner of the old property he is now liable for CGT on it. However, he will be exempt from CGT for the entire time he lived in it as his main home and the remaining period of his ownership will be subject to tax after deducting any further relief

you say he has owned it for 21 years (252 months) and moved out 18 months ago. So 234 months (the calculation must be in months not years) is exempt. In addition, as from April 2014 the final 18 months of ownership of a property which was once your main home are also exempt, irrespective of what you do with it in those 18 months.

So, for example lets say he bought it in January 21 years ago, if he sold it in July 2014 his calculation would be:
ownership period: 252 months (Jan 1993 - Jan 2014) + 7 months (Jan 14 - Jul 14) = 259 months
exempt period : 234 +18 = 252
liable period : 259 - 252 = 7
now lets say he paid 100K for it in 1993 and it sells for 600k in 2014, so his gain over his ownership is 500k. the calculation is: 500k x 7/259 = 13.5k taxable gain. He is entitled to a personal allowance of £10.9k leaving him with a net gain of 2.6k on which he would pay tax at either 18% or 28% depending if he is a basic rate or higher rate taxpayer

in summary - yes he is liable for CGT but depending on the numbers the amount he will actually pay in tax will be insignificant or nil because of the relative length of his exempt period compared to (for the moment) his overall ownership period

Note - the mortgage is irrelevant for CGT purposes as it is based on the gross gain in value not how much net equity you have

tax planning
if the exposure to CGT is a concern then since you are now married he can make you a co-owner meaning when you sell you each have the 10.9K personal allowance. You would "acquire" the property at his original purchase cost not its value at the point of transfer as that is the rules for gifts between married couples.

as you also mention a French property then he (and you if jointly owned) is also exposed to CGT on that as well, since he is subject to UK tax on his worldwide wealth. Although he may be able to claim a tax credit if he has paid the French equivalent of CGT when he sells the French property

Seanymph

yes we are married. We married October '12

Seanymph

Thank you so much - I'll need to run the figures - he paid £34,000 and it's worth around £150,000 now.

so we aren't talking huge figures.

is there any benefit to moving it to joint names to get double the annual allowance?

CLAPTON

Seanymph wrote: »

Thank you so much - I'll need to run the figures - he paid £34,000 and it's worth around £150,000 now.

so we aren't talking huge figures.

is there any benefit to moving it to joint names to get double the annual allowance?

no, joint ownership would be bad news in your specific situation, as you would not enjoy the primary residence relief on your share.

in your current situation there would be no actual tax anyway because your OH has 10,900 cgt relief

in fact if you actually rented it out that would improve the situation as OH would be able to claim letting relief (up to £40,000)

Seanymph

I've never heard of letting relief - is that a relief on the increase in value?

Seanymph

(I understand I sound mercenary - I'm not, we aren't about to make SS homeless - but it's important to understand the implications)

CLAPTON

Seanymph wrote: »

I've never heard of letting relief - is that a relief on the increase in value?

once the property benefits from having actually been lived in by the owner (your OH) they get reliefs

1. for the period they lived there as the PRR
2. relief for the last 18 months (after April, 36 before)
3. letting relief the lesser of
- period of actual let,
- or PPR
-or 40,000

plus of course 10,900 cgt relief


you may find this link useful

http://www.hmrc.gov.uk/cgt/property/sell-own-home.htm