Capital Gains Tax

brushamills

Hi all, Having owned a second property for some years, I would now like to sell. I'm told that a CGT up to 28% could apply .Ouch! Any way of getting around this or keeping it to a minimum? Any advice would be much appreciated,thanks, Brian.

00ec25

be grateful its only 28%, if you have owned it for several years then when you first bought it the rate was 40%.

if you want a full answer then more info needed
- have you ever lived in the property as your main home?
- if yes, did you own another property at the same time ?
- has the property ever been let ?
- are you the sole owner or are there others?
- could you live in it as your main home now and delay selling it for say 6 months?

brushamills

Thanks for prompt reply. More info as follows. Have never used it as main home & have never let it. My parents lived there for quite some time,sadly passed away & the house has been empty for 6 months. Perhaps we should have moved in during that time. Regards, Brian

00ec25

OK I assume you parents transferred this into your name as an Inheritance tax avoidance measure? Perfectly legal to do so but they have now landed you with a CGT bill which there is little you can do to mitigate

you mention "we" but have not answered my question how many owners are there

the taxable gain is the difference between what you paid for it (or its open market value at the time it was gifted to you by parents if you did not buy it from then for full market value) and what you sell it for. Obviously if there is more than one owner the gain is split accordingly

that gain is then split between exempt periods (private residence relief period PRR) and taxable periods as a % of the total ownership period

you have never lived in it as your main home so have no exempt period therefore it is 100% liable

if you move into it now and claim PRR then then this would entitle you to claim what is called the "deemed occupancy" period which is the final 18 months of ownership so for example say you had owned it for 10 years then 1.5/10 ie. 15% of the gain would be exempt. BUT as you have never yet lived there then HMRC will view your PRR claim as a deliberate tax avoidance measure and will therefore subject you to close scrutiny. To succeed with a PRR claim you would need to consider:
a) you cannot now nominate it as your main home as you are past the 2 year deadline for doing so
b) your occupation will therefore be judged by HMRC on the "quality of occupation" as the test of whether it is now your real main home: there is a long but not exhaustive list of indicators of quality, eg:
- does your wife live there also (real family home)
- is your and wife's commute to work from there realistic
- where do the kids go to school
- where does your social life take place
- what address do you use for correspondence
- electoral roll
- where do you spend your time (would friends expect to find you there if they call unannounced)
- how long have you lived there

In theory you can pass these tests having only lived there for 1 day but in reality duration of residency is an obvious criteria hence 6 months is often mentioned. But time is not the key issue, you must also meet the other criteria

that said you are entitled to a personal allowance (£11,000 from 6/4/14) per owner. So if your share of gain is less than 11k then you are liable for CGT but have none to pay

also be aware that if you transfer ownership into your wife's name (such transfers are free of CGT) HMRC will ignore this if you then immediately sell up. General advice is such a transfer must be done well (eg 1 year) before marketing a property for sale

so back to basics, you decide not to try for PRR and you are the only owner, example:
gross gain 100K
your gross salary is 28,000 meaning you have (28,000 + 10,000 income tax personal allowance) = 38,000 - basic rate tax threshold of 31,865 = 6,135 left of any gain chargeable at "lower" rate of 18%

CGT payable:
gross gain 100k - 11k CGT allowance = 89,000 taxable gain
6,135 taxed at 18% = 1,104
and 81 - 6,135 = 74,865 taxed at 28% = 20,962
total tax payable 22,066
net cash left 100,000 - 22,066 = 77,934

roger196

00ec25 wrote: »

also be aware that if you transfer ownership into your wife's name (such transfers are free of CGT) HMRC will ignore this if you then immediately sell up.

I would be interested to know the authority for this.

00ec25

roger196 wrote: »

00ec25 wrote: »

also be aware that if you transfer ownership into your wife's name (such transfers are free of CGT) HMRC will ignore this if you then immediately sell up.

I would be interested to know the authority for this.

I don't have a definitive authority, my source is the numerous posts over the years from various accountants responding to such posts on the cutting tax board

some accountants have had HMRC do this to their clients and so urge caution (ie 1 year)

other accountants on that board vehemently argue that HMRC does not have such a power and that they have opposed any such claim by HMRC, (obviously at cost to their client in accountancy fees!)

Mattygroves2

You've also potentially got an inheritance tax bill as well if they gifted the property to you and then continued to live there without paying market rent. Have a look at reservation of benefits on the HMRC website.

xylophone

The poster doesn't say that the house was gifted to him by his parents - perhaps he bought it for them to live in?

00ec25

xylophone wrote: »

The poster doesn't say that the house was gifted to him by his parents - perhaps he bought it for them to live in?

agreed he does not, however, I was merely illustrating the market value point in case they did, given that it would not be an uncommon scenario for parents to gift a property they own

and I went on to show that either yes or no way makes no difference to the rest of the calculation, his gross gain is the selling price minus either a) what he paid for it or, if gifted, b) its market value at time of gift

unless he bought it before 1988 for parents to live in (so he could claim dependant relative's relief - a very remote possibility I think) the fact remains he owns a house, he is liable for CGT and his original cost is either a) or b)

brushamills

Very much appreciate such a detailed amount of information in response to my question. To clarify, the property was left to me by my grandfather when he died in 1979,value then? I would have to research. I am therefore the second owner. Thank you all again for being so informative & so helpful, regards, Brian.

xylophone

To clarify, the property was left to me by my grandfather when he died in 1979,value then? I would have to research.

Was the house valued for probate?