Another CGT question...

jungle_jeff

I bought a house in July 2005 and lived in it until January 2014, when I relocated and bought one elsewhere. I then let it out.

I'm thinking now may be the time to sell. I've had amazing tenants but I've not really got the time or will to be an accidental landlord with a young family.

I'm trying to work out how much CGT I may be liable for prior to marketing the property. As I understand it, I can make deductions for improvements to the property but not maintenance. While this makes sense, I can't find written anywhere whether these improvements can have been done while the house was let out or when it was my Principal Private Residence - I think pretty much all the work was done when I lived there though.

I did spend quite a lot on improving the property over the time I was there so it would be nice to be able to deduct some of these costs.

I presume I would also be able to deduct all buying (from 2005) and selling fees from my gain first as well?

Thanks

p00hsticks

Before you get into the nitty gritty, how much did you buy the house for and what is the value now ? And will you have your CTG allowance available ? No point faffing about with the detail if the broad picture shows that no CTG is liable anyhow....

xylophone

https://www.theguardian.com/money/2014/feb/12/how-calculate-capital-gains-tax-sell-home

may give some pointers but note date of article.

https://www.tax.service.gov.uk/calculate-your-capital-gains/resident/properties/

MacMickster

As you did live in the property for some time then you can claim relief for it being your principal private residence for the last 3 years of ownership as well as the period that you actually lived there.

As it is only just over 3 years since you moved out then the proportion of any overall gain that is chargeable will be negligible if you sell in the immediate future.

booksurr

MacMickster wrote: »

As you did live in the property for some time then you can claim relief for it being your principal private residence for the last 3 years of ownership as well as the period that you actually lived there.

As it is only just over 3 years since you moved out then the proportion of any overall gain that is chargeable will be negligible if you sell in the immediate future.

ignore this comment - the poster is out of date and appears not to be aware of letting relief. The limit is 18 months, not 3 years

as poohsticks says, consider the rough numbers first

if they indicate you need to worry about the detail here are the mechanics of the calculation....
http://forums.moneysavingexpert.com/showpost.php?p=69071134&postcount=6

the CGT personal allowance remains at £11,100 for 16/17 tax year

jungle_jeff

Bought for 107k. Worth at most 140k I would think.

I believe that I would still have to pay CGT on some of the gain. I had also considered adding my wife to the deeds and holding for say another year to gain her £11,100 allowance but it seems this is a no-no once the home is no longer a PPR.

Plus I would lose half the PRR relief allowance anyway which would probably leave a larger gain (though she did live with me for a while there anyway before we relocated but not sure that's relevant).

So the main improvements versus maintenance/decoration is:

New house roof and insulation to 'improve' (?) attic and board out (create a non habitable room).
New flat roof on bathroom extension with insulation and installation of double glazed window.
New bathroom suite/energy efficient shower.
Part rewire to bring up to modern standards.
Replastered both bedrooms, kitchen and stairs/landing.
Paved rear yard.
New guttering/fascias.
Energy efficient double oven (really clutching at straws now!) :rotfl:
New carpets.
Re-tiled and modernised kitchen.

To be honest I can't see that any of these could strictly only constitute improvements as a lot of the work was required as the house was pretty tired when I bought it therefore I imagine most, if not all, will at some level really be as much if not more maintenance based.

p00hsticks

jungle_jeff wrote: »

Bought for 107k. Worth at most 140k I would think.

I'm not an expert, but I still think you're probably overthinking this, unless there are reasons why you won't have your CGT allowance available to you. .

My understanding is as follows;

Say you sell in July 2017 - you'll have owned the property 144 months. But you lived in it as your PPR for around 102 months, so you exclude this period, plus 18 months after it. So CGT is potentially due on only 24/144 of the total profit, which you say will at most be £33k.

The resulting figure should therefore be well within your CGT allowance without having to worry about the details of whether you can include the cost of new carpets etc....

xylophone's link in post #3 includes a calculator which should confirm if my basic understanding is correct

jungle_jeff

Hmm fully agree! I've just done some rough calculations and Gain - PRR - LR = a negative number. And this is before I even take account of my personal allowance. So no CGT would be due.

OOI then, what does constitute improvement v maintenance (if anyone knows for sure!)

booksurr

jungle_jeff wrote: »

Hmm fully agree! I've just done some rough calculations and Gain - PRR - LR = a negative number. And this is before I even take account of my personal allowance. So no CGT would be due.

correct, with at most a 33k gain (less legal fees, EA costs (and, if you paid any, SDLT - though I assume not with only 107k purchase cost) and a property where you can also claim letting relief worth up to 40k anyway, there is no chance you will be left with a taxable gain even before thinking about your personal allowance.

as the property is already let and you are therefore having to do SA tax returns, please note that you will nonetheless still be required to report that you had a CGT gain therefore must include a CGT page, see "don't have anything to report": (You would therefore be wise to retain a copy of your CGT calculation as part of your own tax records as you are supposed to do for everything you declare on your return)
https://www.gov.uk/capital-gains-tax/work-out-need-to-pay

jungle_jeff wrote: »

OOI then, what does constitute improvement v maintenance (if anyone knows for sure!)

there is not a specific list of what is or is not an improvement. Instead you apply a set of key principles used in categorising work as either a revenue cost subject to income tax (ie a repair) or a capital cost for CGT (ie an improvement). HMRC guidance is actually under the Business Income Manual
https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim46900
The BIM is primarily aimed at clarifying for landlords when they can (or cannot) claim a cost against (income) tax because it is a repairs and so a revenue cost. In doing so it sets out to establish what is in reality a capital rather than a revenue cost and thus subject to CGT not income tax. The point being for HMRC that someone not able to claim revenue costs pays more income tax now and less CGT later, so HMRC gets its money quicker if they can categorise it as capital rather than revenue. The key principles applied are:

1. Replacing an asset – Replacing a part is a repair to the larger asset, replacing the whole asset is not a repair, and is not an allowable deduction for tax purposes because it is capital expenditure. For guidance on what is the asset and whether you are repairing or replacing an asset see BIM46910.
2. Integral features – Replacing certain 'integral features' of a building or structure is treated as capital expenditure. For guidance on what are integral features see BIM46945.
3. Improvements – The cost of improvements to an asset are not allowable expenses – for guidance on what is an improvement see BIM46915.
4. Alterations – the cost of altering an asset so it does something different are not allowable. For guidance on what is an alteration see BIM46915.
5. New materials – repairs are often carried out using new materials. The use of new materials does not mean that the repair is not allowable. For guidance on cases involving the use of new materials, see BIM46920.
6. New technology – the introduction of new technology may mean that the new parts are better than or last longer than the old, but the question to ask is whether the asset as a whole has been improved. If it does the same job as it did before then it may well be simply a repair. For guidance on this point see BIM46925.

so for your list...

New house roof ... New flat roof on bathroom extension with insulation and installation of double glazed window.

all are repairs. The building is the asset, the roof merely part of it and so its replacement is not a new asset, merely a new part on an asset - the case law is around "identifying the entirety".... " Resurfacing a road does not mean that there is a new road; it means that there is a new surface to the road. It is no more a replacement of the road than a new roof replaces a building"
https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim35440

The "new" roof simply returns the building to the condition of having a roof !

... and insulation to 'improve' (?) attic and board out (create a non habitable room).

not so obvious. As you definite it as "non habitable" all you have done is create merely easier to use storage space. Had it been a full blown loft conversion and a habitable room meeting building regs there would be no problem at all with it being capital. Nonetheless, it is creating a new feature and so the costs related to that aspect (not the roof) could be treated as capital
https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim46915

New bathroom suite/energy efficient shower.
Part rewire to bring up to modern standards.
Replastered both bedrooms, kitchen and stairs/landing.
Paved rear yard.
New guttering/fascias.
Energy efficient double oven (really clutching at straws now!)
New carpets.
Re-tiled and modernised kitchen.

all of these are revenue costs, even though new materials are used or new technology has replaced old - the key principles are set out in the BIM, I'll leave you to read it rather than me search for the individual relevant links.
Here is the kitchen replacement one to get you started...
https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim46911


BTW - if any of those repairs were done "wholly and exclusively" for the purposes of preparing the house for letting then you can claim the repair costs against your rental profits provided the work was done no longer than 7 years before the property was let. Note however, if the work was done whilst you were still in occupation there would be a "duality of purpose" in that you as occupant could get a benefit form the work depending on what was done and when. This is called pre commencement expenditure

https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim2505

best get professional advice if you want to try and claim it

jungle_jeff

Thank you for an extremely informative post. I hadn't realised that the HMRC put so much effort into clearing this up, though if not, people would be renovating their letting at the cost of the taxpayer, so when I actually think about it this does make sense.

Well, maybe I'll see what the tenants do and if they stay another year maybe I'll leave it another year. Will have to have a think. But thank you all for your advice and help. - hugely appreciated! :beer: