CGT and Letting Relief

Dr_Dr

I wonder if you can give me a cost of CGT. I have been agonising over the calculations and would appreciate some help, there is so much conflicting and confusing information about.

My daughter is self-employed. She bought a house in London in 2004 where she lived until 2011. She then married, and rented out (off and on) the property until 2019.

Her marriage was a disaster and she moved out of the marital home into rented accommodation and sold her London house in 2019. The divorce is ongoing.

I calculate she owned the property for 183 months and rented it out for 97. I also understand that she gets the final 18 months as a resident. There is also PRR and PLR. I have also read about failed marriages being taken into account for CGT.

The cost for purchase, extension and refurbishment (not all receipted as she never bought it to rent out) and sale costs I calculate as £496,563.

She sold it for £850,000

During year 2019-20 she earned £24,339.

Any help will be appreciated.

oldbikebloke

don't see what you find confusing about post #2, but hey ho, on we go...

for the benefit of future readers you are talking about a sale in 19/20 tax year as the rules changed after that date. (ie contracts exchanged on or before 5 April 2020)  in which case she is still entitled to claim LR and file the CGT calculation and pay the tax with her tax return (so Jan 21 at latest).

the marriage/divorce is irrelevant as it was a let property, not the marital home 

we will accept your claim the refurb costs are all qualifying capital costs since you have not detailed them so we can't see where you are in error between a capital and a revenue cost 
so, for illustration purposes (in round sums only)....

gross gain: sales price  850,000 - purchase price incl other costs 496,563 = 353,437

PRR 183 owned, let 97, so PRR period = 183 - 97 +18 = 104. Therefore let period 183 - 104 = 79
353,437 x 104/183 = 200,860

LR: LOWER OF
a) PRR 200,860
b) gain in let period 353,437 x 79/183 = 152,576
c) max allowed 40,000

net taxable gain:
 353,437 - 200,860 - 40,000 - 12,000 CGT allowance = 100,577

we will assume 24,339 is the GROSS pay, so for 19/20 net taxable pay 24,339 - 12500 = 11,839. Therefore remaining amount of basic tax band 37,500 - 11,839 = 25,661

CGT payable 
25,661 @18% = 4,618
(100,577 - 25,661) = 74,916 @28% = 20,976

total tax to pay 25,594

jimmo

oldbikebloke said:

LR  353,437 x 79/183 = 152,576

Shouldn't that be 40,000?

oldbikebloke

jimmo said:

Shouldn't that be 40,000?

amended, as i said, what is unclear about post #2?

Dr_Dr

That's brilliant thanks,

what about the CGT allowance though, should that be included?

oldbikebloke

Dr_Dr said:

That's brilliant thanks,

what about the CGT allowance though, should that be included?

quite right, really did not do this one very well 
POST ABOVE NOW FULLY (?) COMPLETE 

please bear in mind that the PRR period calculation (183 owned, let 97, so PRR period = 183 - 97 +18 = 104) is effectively saying that the rental continued up to the day the property was sold. 
If the 97 ended before then, the 18 months adjustment will need to be done differently.

Dr_Dr

Oldbikebloke, thanks so much. Perhaps you are stuck at home, like me, with nothing to do?

I hate to take over this whole thread, but your answers raised another couple of points.

1. After the last tenant left, the house was empty for 3 months whilst on the market, so will that reduce the 18 moth period?

2. Capital costs, included - Purchase cost, stamp duty, legal fees, associated purchase costs (? not sure exactly), roof extension planning & building costs, redecoration, new sanitary ware, 3 replacement ceilings, extension bespoke furniture, fencing, boiler replacement, white goods, wooden floors, sale agents feed, legal fees. My daughter is adamant that she is reasonable and does not want to cheat the taxman, so do these items sound reasonable? It is true that most of them were for her own benefit as it was never intended to be rented out.

One final point. I agree that post 2 is excellent, however, it was written Dec 2017. Every year the tax system is tweaked with subtle changes which can easily be overlooked with possible consequences. I was trying to be careful.

Again, thanks for your support!

oldbikebloke

Dr_Dr said:

Oldbikebloke, thanks so much. Perhaps you are stuck at home, like me, with nothing to do?

I hate to take over this whole thread, but your answers raised another couple of points.

1. After the last tenant left, the house was empty for 3 months whilst on the market, so will that reduce the 18 moth period?

2. Capital costs, included - Purchase cost, stamp duty, legal fees, associated purchase costs (? not sure exactly), roof extension planning & building costs, redecoration, new sanitary ware, 3 replacement ceilings, extension bespoke furniture, fencing, boiler replacement, white goods, wooden floors, sale agents feed, legal fees. My daughter is adamant that she is reasonable and does not want to cheat the taxman, so do these items sound reasonable? It is true that most of them were for her own benefit as it was never intended to be rented out.

One final point. I agree that post 2 is excellent, however, it was written Dec 2017. Every year the tax system is tweaked with subtle changes which can easily be overlooked with possible consequences. I was trying to be careful.

Again, thanks for your support!

1. HMRC define the end of the "rental business" as when the property ceased to be used for letting purposes. If the property was then immediately placed on the market, then you are fine because a 3 month period eminently reasonable in "winding up" the rental business and selling off the property. No adjustment needed to the 18 months as the letting ends during that period.

2. Capital costs, included -
Purchase cost, stamp duty, legal fees, associated purchase costs = easy YES
roof extension planning & building costs, = easy YES
redecoration = only if this was ancillary to the work on the extension. If it involved redecoration elsewhere in the property it would be a revenue cost and, if eg. to ready it for letting, should have been claimed as costs against rental profit - SEE LINK
new sanitary ware, in the extension? So forms part of the ancillary fitting out costs of the buildings works? Yes = allowed. If on other hand is simply replacing / updating elsewhere in property, no, same principle, is a revenue cost for rental profits 
3 replacement ceilings, no - those are repairs and therefore revenue, not capital 
extension bespoke furniture, is this fitted and therefore will form part of fixtures and fittings when sold? Gut reaction = grey area. If freestanding, then no
fencing, no = repair 
boiler replacement, no = repair. There was a boiler, there is now a "new" boiler. That is not a capital improvement, merely a "repair". If the cost includes extending pipework to the extension etc and that element of the cost can be segregated on the bill you might have a chance for that bit of it, but not the boiler itself SEE LINK
white goods, unlikely unless integrated appliances forming an ancillary part of the overall project costs 
wooden floors, doubtful, likely to be a repair even if changed only for cosmetic purposes not because the floor was rotten (latter obviously being a repair)
sale agents feed, legal fees = easy YES

at least a few from that list look to be pre-commencement expenditure that she could have claimed against rental - too late now obviously 

Note the following links are looking at the "allowable" nature from the point of view of claiming against rental income, so the question being answered is it revenue? The principles are however those applied when, as in your context, the question is reversed, is it capital, not revenue? Just be clear that where it says "allowed" it means yes it is revenue  
https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim2025
https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim2030
https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim46915

Dr_Dr

Well thanks for all the good advice which I am now trying to put into practice using the IR Self Assessment facility along with the 2019-20 notes. I have found it all somewhat confusing.

In the table Claim, election or notice it provides a series of codes.

code - PRR - PRR where LR does NOT apply

code LET - PRR where LR applies

I expected codes PRR and LR so that I could claim both allowances, so must I add them both together and enter the result under LET?

It simply could not be made more complicated even if you tried!

oldbikebloke

Dr_Dr said:

Well thanks for all the good advice which I am now trying to put into practice using the IR Self Assessment facility along with the 2019-20 notes. I have found it all somewhat confusing.

In the table Claim, election or notice it provides a series of codes.

code - PRR - PRR where LR does NOT apply

code LET - PRR where LR applies

I expected codes PRR and LR so that I could claim both allowances, so must I add them both together and enter the result under LET?

It simply could not be made more complicated even if you tried!

by definition, in order to claim LR, you have to be eligible for PRR in the first place so, as it says, use code LET

PRR is inherent to the use of that code and so does not need to be separately claimed. The calculation of LR involves, as you have done, the calculation of PRR as well to arrive at the single total taxable gain net of all relief

(except the annual exempt amount which is applied by the system for you before you wonder where to enter that )