Calculating capital gains tax

booksurr

swindiff wrote: »

I bought a property in Oct 2013 for £165k + purchase costs. I did a basic renovation at a cost of about 3k and let it out in Dec 2013. The property was always intended to be my residence with my partner but we were not ready to live together at the time but could see house prices were on the rise so made our purchase then.

We intend moving into the property together around June 2016 and getting married the following year. The current value is around £220k

The property is currently in my name only, my partner has a property to sell so when we move in together that will be sold and we will re-mortgage the property we will be living in, in both our names with 50/50 ownership.

My salary is £40k and my partners is around £15k, although we expect that to rise to around £25k after the move.

My question is, how long would we need the property to be our main residence for, to not be liable for any capital gains tax. Is there a formula somewhere for capital gains on properties that have been part let, part lived in?

for your particular circumstances....
up to June 2016
to date you have never occupied the property as a home therefore to date it liable for CGT on the full gain 220-165 - personal allowance 11,100 = 43,900 most of which will be taxable @ 28% as you are close enough to the higher rate tax threshold (42,385) that the amount taxable at 18% is only 2,385 given a 40k salary (+ any other taxable income you have eg: interest, dividends etc)

after June 2016
note occupation is a requirement
http://www.hmrc.gov.uk/manuals/cgmanual/CG64465.htm
therefore once you move in you start to accrue Private Residence Relief. (PRR)
on that basis you are also entitled to claim Letting Relief (LR) as the rule for that is it must once have been your home. (Once can before or after occupation, hence your ability to claim it having started occupation in June 16)

here is an example of the calculation as your question crops up repeatedly, however, if you had asked on the cutting tax board it might have avoided responses from people who don't know about CGT but like to post nonetheless

https://forums.moneysavingexpert.com/discussion/5315071

PLEASE NOTE
a) if you make the girlfriend a co owner that will trigger the CGT calculation as it is a disposal of your share, don't do that !

b) if you make her a co owner after you are married the transfer will be tax free BUT she will not acquire any right to claim Letting Relief as she was not an owner whilst is was let prior to 2016. Your CGT liability as a married couple might therefore be higher than you retaining sole ownership.

Follow the example in my link above and do the sums yourself. Post your calculations up and someone can check it for you, you need to do a comparison:
a) CGT liability for your sole ownership having claimed PRR and LR
v
b) joint ownership with the wife (waste of time doing joint with non wife) where wife can claim PRR but not LR whereas you can claim both

booksurr

DCF_Evaluator wrote: »

booksurr

That is good advice, thanks. The timings suggested are not our situation at all and any transfer could well be set aside ... will give it some thought.

Simultaneously am considering requesting an HMRC CG34 probate valuation; the probate valuation of 18m ago was a 'guestimate' without professional input and likely too low. Was wondering if anyone has experience of the CG34 route? ... ie is it hazardous, lengthy, worth pursuing etc ..? And what if CG34 comes up with a LOWER valuation than probate ..? Is the taxpayer then bound by it regardless?

thanks

1. set aside is rare - whilst HMRC is notified of all property sales in the UK and therefore has perfect knowledge of your timings from inheritance even if their computer system flags it up that does not necessarily means one of their overworked staff will action anything at all. More common for it to be ignored but a gamble nonetheless.

2. the CG34 valuation is binding

3. when you submit your calculation on your tax return HMRC will consult the VOA anyway and since the VAO are the ones who provide the CG34 valuation there is no avoiding use of the "official" value if (big if) it is sufficiently far enough adrift from your figure that the tax payable is worth HMRC imposing the different value on you - again a gamble you can take...

POPPYOSCAR

booksurr do you happen to know if the IR use the same source as the mortage lenders to value property?

swindiff

marksoton wrote: »

So pay a visit to your local tax office or as i suggested employ an accountant.

Don't expect someone on here to provide you a bloody Excel spreadsheet for gods sake...

I am quite capable of creating my own spreadsheet thanks. The point of posting on here is to get advise from people who have a greater knowledge of tax law than myself. That clearly isn't you as you have nothing helpful to add.

For others that may be more helpful, does this look right

Description_______________Variable_______________Value
Ownership Period (months)___O____________________66
Residency Period (months)___R____________________36
Let Period (months)_________L____________________30

Purchase Price____________PP____________________£165,000.00
Stamp Duty_______________SD____________________£1,650.00
Purchase Costs____________PC____________________£1,000.00
Sale Costs________________SC____________________£2,000.00
Sale Price________________SP_____________________£220,000.00

Letting relief rule (months)____LR____________________18


Profit_____________________P = SP-(PP+SD+PC+SC)___£50,350.00
Private Residence Relief______PRR = ((R+LR)/O)P_______£41,195.45

Taxable Gain_______________TG = P-PRR_____________£9,154.55

Letting Relief (lower of the 3 following values)
Fixed Amount__________________________________£40,000
PRR_________________________________________£41,195.45
Taxable Gain__________________________________£9,154.55

I am not sure if I am entitled to the 18 months relief, as I would be resident when selling. All the case studies I can find relate to the property being lived in first and then being let out for a period and sold, we have done it the other way round, let first then live in it. Is seems to me though that as long as the taxable gain does not exceed £40k or the PRR then no capital gains would ever be due and thats without taking into account the annual allowance of around £11k each. Is that right or are my calculations wrong?

Without the 18 months allowance, the taxable gain would still only be £22,886.36, so I could use this as letting relief and still pay not tax, if I am interpreting the rules correctly.

The property would need to sell for around £258k without the 18 month rule before the taxable gain exceeded the £40k letting relief max limit.

swindiff

Thanks booksur, I posted before I read your post

booksurr

POPPYOSCAR wrote: »

booksurr do you happen to know if the IR use the same source as the mortage lenders to value property?

the Valuation Office Agency is a Govt dept (part of HMRC itself) so no lenders cannot use the VAO

In principle both a lender and the VAO are using the same source data, ie Land registry records of house sales prices. However, one would assume that lenders will tinker with that data themselves since we have national indices of house prices published by them anyway and what the difference between their values and the VAO values are is a matter of the professional judgement of the surveyors and valuers employed by each organisation

booksurr

swindiff wrote: »

I am quite capable of creating my own spreadsheet thanks. The point of posting on here is to get advise from people who have a greater knowledge of tax law than myself. That clearly isn't you as you have nothing helpful to add.

For others that may be more helpful, does this look right

Description_______________Variable_______________Value
Ownership Period (months)___O____________________66 ? in#1 you said purchased in Oct 2013 so 66 months ownership is a sale in March 2019
Residency Period (months)___R____________________36 June 16 +36 = may 2019
Let Period (months)_________L____________________30 agreed Dec 13 - May 16 = 30

Purchase Price____________PP____________________£165,000.00
Stamp Duty_______________SD____________________£1,650.00
Purchase Costs____________PC____________________£1,000.00
Sale Costs________________SC____________________£2,000.00
Sale Price________________SP_____________________£220,000.00

Letting relief rule (months)____LR____________________18


[STRIKE]Profit[/STRIKE] the correct word is Gross Gain (hence CGT!)_______P = SP-(PP+SD+PC+SC)___£50,350.00 agreed
Private Residence Relief______PRR = ((R+LR)/O)P_______£41,195.45 no 50,350 x (36/66) = £27,464 note you cannot add the final 18 months deemed occupation as that would be double counting since you are actually in occupation in the final period

Letting Relief (lower of the 3 following values)
Fixed Amount__________________________________£40,000
PRR_________________________________________[STRIKE]£41,195.45[/STRIKE]
Taxable Gain__________________________________[STRIKE]£9,154.55[/STRIKE]
Letting relief: lowest value (50,350 x 30/66) = £22,886

NET Taxable Gain_______________TG = P-PRR_____________£9,154.55 no. 50,350 - 27,464 - 22,886 = ZERO Personal allowance 11,600 not yet needed

I am not sure if I am entitled to the 18 months relief, as I would be resident when selling. you won't

see above comments. i have ignored the timeline inconsistencies and used your original month counts for the sake of the illustration

swindiff

That's great, thanks booksurr. Why people feel the need to post when they have nothing positive to add I don't know.
I do find it strange that if I were to effectively give half the property to my partner before she became my wife I could be liable for capital gains tax. When I would have gained no capital from doing so. Quite the opposite.

booksurr

swindiff wrote: »

That's great, thanks booksurr. Why people feel the need to post when they have nothing positive to add I don't know. although there are a few posters on the housing board who know CGT patently it would be better to post on a tax related board for a tax question to avoid the situation you have just experienced

I do find it strange that if I were to effectively give half the property to my partner before she became my wife I could be liable for capital gains tax. When I would have gained no capital from doing so. Quite the opposite.

when I said earlier that gifting to your GF pre-marriage would trigger CGT then please appreciate that there are 2 concepts at work. Triggering CGT by disposing of your asset means you have crystalised the tax "liability" and must do the calculation, ie you are liable.

However, the calculation will establish if the second concept applies, ie. what is the result of the calculation - is anything "payable"?

being liable does not always mean you end up having to pay anything.

think about it - if tax law did not make it a chargeable event ("disposal") when anyone other than spouses "gave" something away for nothing, it would instantly be used to avoid inheritance tax by transferring assets down the generations

the same rule therefore applies to people who have no blood or legal relationship for the same reason. If there is tax payable then it must be paid, not avoided. The only exception being between spouses where there is never any payable amount

Note the reason to avoid giving to your GF is:
a) yes you would have nothing to pay BUT
b) she paid nothing to you for it so when she comes to sell at a later date her purchase price is zero and her gain is "huge". If she then married you at a later date the liability for the gain pre marriage would not go away. Much simpler to wait til you marry when tax law then says she gets it at your original purchase price, not at zero cost.

swindiff

Thanks again. Would I therefore do the calculation for half the profit at current market value?