Capital Gains Tax pickle - advice please

kissprudence

*ADVISED TO POST IN THIS TAX SECTION - previously posted in mortgages section*

I bought a house in 2003. In 2012 I moved out of this house and into rented accommodation to be closer to work. In 2011/12, I tried for 18 months to sell the house but never had an offer despite knocking almost 10% off the valued price. The house I own has been tenanted from when I moved out until present day.

In two years time, I want to go travelling for 6 months. When I get back I want to sell the house. This house has not been my 'main residence' since October 2012. I think there is £25-30k of equity in the house. I know that the first £10k is tax free so I am looking at approximately a £4k tax bill (basic rate tax payer). I was wondering if there are any things I can do to reduce my CGT bill? A friend who works in tax said that I could ask my tenant to move out before I go travelling and before I go away I could change all the bills into my name. When I come back, she said I should live there for a minimum of three months and that may be ok although apparently the law is hazy when it comes to how long someone should live in a house for it to be classified as their main residence for CGT purposes. I really don't want to move back into the house and live there for a long time. It is not near work and the area has really gone downhill in the last decade. I just want to sell it so that I can buy again in an area in which I am now settled and I love.

Does anyone have any advice/ experience about the above?

PS please could people be nice/ respectful when they reply. I have posted a couple of times before on different issues and people can get really aggressive for no reason
PPS before anyone chips in YES - the house is rented out completely above board. I have permission from the building society, a signed tenancy agreement, the tenants deposit is protected with DPS, full landlords insurance yadda yadda

CLAPTON

kissprudence wrote: »

*ADVISED TO POST IN THIS TAX SECTION - previously posted in mortgages section*

I bought a house in 2003. In 2012 I moved out of this house and into rented accommodation to be closer to work. In 2011/12, I tried for 18 months to sell the house but never had an offer despite knocking almost 10% off the valued price. The house I own has been tenanted from when I moved out until present day.

In two years time, I want to go travelling for 6 months. When I get back I want to sell the house. This house has not been my 'main residence' since October 2012. I think there is £25-30k of equity in the house. I know that the first £10k is tax free so I am looking at approximately a £4k tax bill (basic rate tax payer). I was wondering if there are any things I can do to reduce my CGT bill? A friend who works in tax said that I could ask my tenant to move out before I go travelling and before I go away I could change all the bills into my name. When I come back, she said I should live there for a minimum of three months and that may be ok although apparently the law is hazy when it comes to how long someone should live in a house for it to be classified as their main residence for CGT purposes. I really don't want to move back into the house and live there for a long time. It is not near work and the area has really gone downhill in the last decade. I just want to sell it so that I can buy again in an area in which I am now settled and I love.

Does anyone have any advice/ experience about the above?

PS please could people be nice/ respectful when they reply. I have posted a couple of times before on different issues and people can get really aggressive for no reason
PPS before anyone chips in YES - the house is rented out completely above board. I have permission from the building society, a signed tenancy agreement, the tenants deposit is protected with DPS, full landlords insurance yadda yadda

since you actaully lived there for 9 years, in addition to the cgt allowance you also have
PRR allowance (period of actual residence plus last 18 month
and
letting allowance

in practice this mean you will have no tax to pay

booksurr

your friend may work in tax but CGT is clearly not their area of knowledge and their advice is best avoided

the amount of equity is irrelevant, you are taxed on gain not equity

the gain is based on the difference between what you sell it for less what it cost to buy and less any EA and legal fees associated with its purchase and sale (and less SDLT on the purchase if applic)

that gain is then split between
a) the time you lived in it 2003 - 2012 PLUS the final 18 months of ownership whether you live in it then or not. Moving back in is pointless.
b) the time it was let out (excl the final 18 months of ownership)

a) is an exempt amount and b) is subject to some limits

provide the following info if you want an example calculation of your liability
- month of purchase in 2003
- purchase cost (and estimate of fees)
- estimated selling price (and estimate selling fees)

kissprudence

Thanks. I would be really grateful if you could work out the CGT for me.
Purchased in December 2003.
Purchased for £60k (cannot remember what the fees were).
Remortgaged in July 2005 to £70k.
Selling price will be around £80k (let's say EA fees of £2k)

CLAPTON

kissprudence wrote: »

Thanks. I would be really grateful if you could work out the CGT for me.
Purchased in December 2003.
Purchased for £60k (cannot remember what the fees were).
Remortgaged in July 2005 to £70k.
Selling price will be around £80k (let's say EA fees of £2k)

if you sell before about 2020 ish you will pay no tax depending upon the details at the time

booksurr

kissprudence wrote: »

I bought a house in 2003. In 2012 I moved out of this house and into rented accommodation to be closer to work. The house I own has been tenanted from when I moved out until present day.

This house has not been my 'main residence' since October 2012.

kissprudence wrote: »

Purchased in December 2003.
Purchased for £60k (cannot remember what the fees were).
[STRIKE]Remortgaged in July 2005 to £70k.[/STRIKE]
Selling price will be around £80k (let's say EA fees of £2k)

Thanks. I would be really grateful if you could work out the CGT for me.

so you understand the calculation as well as the result and can therefore play around with different scenarios here is the calculation in detail .... bearing in mind mortgages and (mortgage) equity are irrelevant as are any valuations other than what it cost to buy and what you get when you sell it. The calculation should be done in months (or days if you want) but never in whole years.

let us say you sell in Dec 2020 so the total ownership period since purchase in Dec 2003 is 205 months

let us also say you have never lived in the property since Oct 2012 (when it was first let)

on the basis it was your main home from Dec 2003 - Sept 2012 (which is a period of 106 months) you are additionally entitled to the final 18 months of ownership as "deemed occupation". It does not matter whether you live there or let it in those final 18 months, the idea is it gives you a grace period in which to sort out selling it, even if you have already moved out, or even if you continue to let it right up to the date it sells. Therefore your "occupation period" is 106 + 18 = 124 months

You let it from Oct onwards until it was sold in Dec 2020, that is 99 months (205 - 106) but the final 18 months are already included above so the let period is 99 - 18 = 81

note you get a one time Personal Allowance (PA) in the year of sale. This is on a use it or lose it basis, you cannot carry over any unused amounts if you have not used it in prior years. For 15/16 tax year the rate is currently £11,100.

Calculation
1. Gross Gain: 80,000 - 60,000 - 2,000 (EA Fees) = £18,000 gain

2. Private Residence Relief 18,000 x (124/205) = 10,888

3. Letting Relief - this value is limited to the LOWEST amount of a) or b) or c)
a) PRR value calculated at 2 above = 10,888
b) gain during the let period: 18,000 x (81/205) = 7,112
c) Maximum allowed value = 40,000
the lowest is therefore b) = 7,112

4. personal allowance £11,100

5. Net Taxable Gain
Gross gain - PRR - LR - PA = ?
18,000 - 10,888 - 7,112 - 11,100 = ZERO

you would have no taxable gain so no CGT to pay

obviously in another 5 years by 2020 one would hope the value was more than 80k, but even so, it will be a long time before you face a +ve net taxable gain and so have to pay CGT

in reality, based on the figures you quote, you still have 32,888 of letting relief before you hit the 40k cap (40,000 - 7,112) AND you also have the whole of your personal allowance (assuming you have no other gains in the year of sale). We have also effectively ignored some of the costs you can offset against the gain, eg: the legal fees associated with both purchase and sale, EA fees on the sale and , if applic (although not in your case with only a purchase cost of 60k), the SDLT you paid on purchase. Therefore the property could increase in value by around another 50% or at least £44,000 over its current 80,000 value before paying CGT would be a risk

the above calculation may look complex but there are only 2 variables:
- sales value
- date of sale

everything is driven by those 2 figures, so if the value increases massively your sale date may have to be earlier. If it increases slowly your sale date can be later

fenetia

We sold our main home to downsize in December 2011, we planned to rent while we found a suitable property . We purchased a property in 2013 and renovated it, we like the rented property so much we have stayed. My son has lived there while he looks for his own property when he moves my other son would like to stay there. Although this is our sole owned property I am not sure we will live there in our retirement as planned. Will we have to pay capital gains if we sell.

Any responses will be appreciated

Thank you

CLAPTON

fenetia wrote: »

We sold our main home to downsize in December 2011, we planned to rent while we found a suitable property . We purchased a property in 2013 and renovated it, we like the rented property so much we have stayed. My son has lived there while he looks for his own property when he moves my other son would like to stay there. Although this is our sole owned property I am not sure we will live there in our retirement as planned. Will we have to pay capital gains if we sell.

Any responses will be appreciated

Thank you

its best to start your own thread rather that using an old one

if you have lived in the property since you bought it then there is no cgt
otherwise please provide the details

booksurr

fenetia wrote: »

We sold our main home to downsize in December 2011, we planned to rent while we found a suitable property . We purchased a property in 2013 and renovated it, we like the rented property so much we have stayed. My son has lived there while he looks for his own property when he moves my other son would like to stay there. Although this is our sole owned property I am not sure we will live there in our retirement as planned. Will we have to pay capital gains if we sell.

Any responses will be appreciated

Thank you

the CGT exemption is not because it is the only place you own, it is entirely down to whether it was your main or main residence

from the sounds of it you have never lived in it as your residence since you have lived only in the rented property

what you children do/have done is irrelevant

as things stand at present yes you will be liable for CGT as, apart from the personal allowance, you are ineligible for any other relief since it is not your home. If you do move into it in the future and then subsequently sell it, you will get some PRR for the period you lived there but not for the whole ownership. Undoubtedly therefore you will have a liability for CGT when you sell and tax to pay depending on the numbers...