Capital gains tax on 2nd property

JMW77

We are selling our second house which my mother in law has been living in rent free for about 15 years.
She bought it off the council about 20years ago then sold it to us when she wanted to free some money up as she was struggling to afford the mortgage with her other debts. We bought it a very good price so we didn't charge rent we just kept it as an investment for our daughter one day.
Mother in law is now moving in with us and we have put the property on the market.
I know nothing at all about capital gains tax can anyone tell me how i work it out.
It will have gained approx 100,000 in 15 years.
Im thinking maybe we should have rented it out as i fear we are going to be hit with a huge CGT bill.
If we buy another property what happens also? does that change anything?


Thanks

runninglea

JMW77 wrote: »

We are selling our second house which my mother in law has been living in rent free for about 15 years.
She bought it off the council about 20years ago then sold it to us when she wanted to free some money up as she was struggling to afford the mortgage with her other debts. We bought it a very good price so we didn't charge rent we just kept it as an investment for our daughter one day.
Mother in law is now moving in with us and we have put the property on the market.
I know nothing at all about capitol gains tax can anyone tell me how i work it out.
It will have gained approx 100,000 in 15 years.
Im thinking maybe we should have rented it out as i fear we are going to be hit with a huge CGT bill.
If we buy another property what happens also? does that change anything?


Thanks

Is it in joint names

JMW77

Yes it is , me and my partner.

kinger101

I assume you never lived in the property during your ownership. I'll also assume you and your spouse bought it jointly off MIL.

Technically, the property would have been acquired at open-market value at the time it was purchased. This is because the disposal was between connected persons. So that, plus any legal expenses, is your base cost.

You are not entitled to private residence relief, as it wasn't your private residence (during ownership). Similarly, letting relief only applies to properties which were once your private residence and were let.

So, no residence or letting relief, but assuming equal shares, you'll both be entitled to an annual CGT allowance of 11,700 (from 6 April 2018)

Let's assume capital gain of £100K, or £50K each.

Capital gain (£50K) - allowance (£11,700) = £38,300 gain. This will then be taxed at 18% (basic rate) or 28% (higher rate), depending on the tax band (or a combination of the two).

What you've done might have suited both parties at the time, but it wasn't tax-efficient. Worth speaking to an accountant or tax advisor before any property transactions involving somewhere that isn't your home.

runninglea

Need sale proceeds, value of property when bought from MIL, any related costs of buying and selling, refurb costs you may have spent and also your other income. CGT will be at either 18 or 28% depending of how much income you have. Higher rate tax payer?

Also if you buy another property youll have to pay extra stamp duty

JMW77

So are you saying we only get relief for one year ?

If i have understood you.

And approx £5,500 capitol gains tax each if say the figures are accurate.

I am a non tax payer does that change anything?

Slithery

No, you don't get any relief as it was never your primary residence.

Each of you gets an allowance of £11,700 on any capital gains you make this tax year, anything over that is taxable.

You're probably looking at around £7500 each, a bit more for your partner if she is already paying tax on her earnings.

runninglea

50000 profit

11300 Capital gain allowance

38700 profit

33500 @ 18% 6030

5200 @ 28% 1456

This assumes no other income and no buying,selling renovation costs etc.

Your partner will be diff depends on income

00ec25

JMW77 wrote: »

So are you saying we only get relief for one year ?

If i have understood you.

And approx £5,500 capitol gains tax each if say the figures are accurate. No, that is wrong. Each person's share of the gain will be over 30,000 so it is near impossible for at least some of it not to fall into the 28% CGT bracket unless the non tax payer literally has zero income

I am a non tax payer does that change anything?

each owner gets one allowance only in the year of sale, ie. as mentioned, £11,700 if sold on/after 6/4/18

the tax band you are in for income tax does not determine what rate of CGT you pay. It is your total income including the gain which dictates that, rather than type it all out again, read posts 8 & 10 on this thread from yesterday to see the mechanics of the calculation:

https://forums.moneysavingexpert.com/discussion/5814120

in your case, the WORST case would be 100k gain.
Your share of the gain = 50k less 11,700= 38,300 x 28% 10,724 tax to pay
Partner's share of the gain = 50k less 11,700= 38,300 x 28% 10,724 tax to pay

kinger101

NB - renovation costs generally aren't allowed, unless you can demonstrate they're reflected in the value of the property at the time of disposal. This is quite rare for residential properties, and can happen for instance where a probate property is fixed up before a sale. Ongoing maintenance doesn't count.

The CGT allowance is much like your income tax personal allowance. You get one each year. It does not carry forward if unused.

Mojisola

JMW77 wrote: »

It will have gained approx 100,000 in 15 years.

i fear we are going to be hit with a huge CGT bill.

You'll still make a very healthy gain on your initial purchase price for no effort on your part.