CGT and how to avoid paying it

thenap80

So I have a tenant who wants to buy the house. I basically would but am concerned over CGT. But I think there may be a way to avoid it...

I lived in the house for ten years. My first and only house. She has lived there for 5 years. So I know somehow I pay only CGT on a third of the profit, which would be about 150,000 if she was to buy from me. 

But I do not have an income over than her rental payment. So with that in mind, if I was to delay any sale until a new tax year, would the gain be within the threshold for having to pay tax on all of it. So I get 12k or so CGT allowance on top of Personal Income allowance. I'd only need to pay maybe the 18% CGT on a very minute amount.

Jeremy535897

You cannot set your unused personal allowance against capital gains. The figures are not quite as bad as you think, because the last 9 months of ownership will be treated as exempt, as well as the 10 years you lived there. But you will have to make a return and pay capital gains tax within 30 days of completing the sale to your tenant.

thenap80

Last nine months of ownership is exempt as well as the ten years I lived there! So only four years to pay on. And I still get the 12k (whatever the exact value is) CGT allowance?

thenap80

And if I have to pay CGT within 30 days of sale, does that mean the tax isn't aligned with the April to April tax year?!

Jeremy535897

The CGT annual exemption is £12,300 for 2020/21. The tax paid within 30 days of completion is on account of your overall CGT liability for 2020/21. See:
https://www.tax.service.gov.uk/capital-gains-tax-uk-property/start/report-pay-capital-gains-tax-uk-property?_ga=2.245893127.2044502986.1586156364-921708348.1578308931

thenap80

I read there that only pay CGT if it is a second home. Theoretically, it is the only home I own. I live with my wife in rented accommodation. Do I still pay CGT?

Thank you

Jeremy535897

Yes you do, because a rented home is still a home. I assumed that you were single. If you are happy to give part of the house to your wife before selling it, you could use her capital gains tax exemption as well as yours. You would need to take proper tax and legal advice.

thenap80

Thanks Jeremy...
She is higher rate tax payer so does she still get an allowance for CGT a year? And when you say give her half, is that just having a solicitor put her name on deeds? 

Vegas2010

thenap80 said:

Thanks Jeremy...
She is higher rate tax payer so does she still get an allowance for CGT a year? And when you say give her half, is that just having a solicitor put her name on deeds? 

Yes still gets CGT allowance, but you would only want to transfer a proportion of the gain otherwise she could potentially be taxed at a higher rate on it than you, although I expect not if you think the gain is £150k.
Probably depends on mortgage situation but I believe the gift may be possible without having to formally go on the deeds particularly if just before sale - check with a solicitor.
Finally, are you confident you have done the calculation and the house has gone up in value by over £1/2m (i.e. when you take into account costs of buying/selling etc) for there to be that size gain. Appreciate it is possible but people tend to live in those houses rather than rent out but worth a check by putting down purchase price, sale price, costs of buying and selling, any renovation costs etc.

Edited to add - was £150k total profit or a third of profit, first post is unclear but still worth doing the calculation.

Jeremy535897

I think OP means the total potential gain is £150,000, and so the taxable gain will be a little under £50,000. Splitting that between two people means it is further reduced by £24,600 instead of £12,300 for annual exemptions.

The transfer should be done properly, by a solicitor, which is awkward at present. The simplest way to do it is by a short declaration of trust, that states the proportions in which the property is held, but leaves the legal title in the hands of the original owner. The transfer will take effect for income as well as proceeds, so it would be sensible to delay doing it until shortly before contracts are exchanged for the sale of the property to the tenant. There are separate rules regarding elections to apportion income on jointly held assets, and the way joint ownership is achieved may affect that. It cannot be done after contracts are exchanged, or it will be ineffective for capital gains tax. Tax advice should be taken in case there are other facts we don't know about that might affect the computation of the gain, which might include whether husband and wife were married and both occupied the property before it was let out.

[Deleted User]

Jeremy535897 said:

Iso it would be sensible to delay doing it until shortly before contracts are exchanged for the sale of the property to the tenant. There are separate rules regarding elections to apportion income on jointly held assets, and the way joint ownership is achieved may affect that. It cannot be done after contracts are exchanged, or it will be ineffective for capital gains tax. Tax advice should be taken in case there are other facts we don't know about that might affect the computation of the gain, which might include whether husband and wife were married and both occupied the property before it was let out.

I follow your advice quite a bit on this forum and have great regard for it. However, to transfer the property into joint names shortly before sale is open to a challenge  by HMRC. There have been many threads on this over the years. Quite simply HMRC would suggest that the sole reason for this reason was to avoid CGT - there was no commercial reason or, indeed, any other reason. General advice would be, conversely, to wait a ‘reasonable period of time’ before sale. At least have some period when  the new joint owner paid tax on part of the income. All the other advice that you have given regarding solicitors etc is perfect. 

I have dealt with clients who have had such transfers challenged, even where I had recommended my own advice above and including one transfer into joint names where a wife died before the HMRC investigation.

Example here:

https://www.taxation.co.uk/articles/2006-03-16-3904-transfer-troubles

And a thread here with comments from the excellent 00ec25 who, sadly, appears to have departed us.

https://forums.moneysavingexpert.com/discussion/5862422/cgt-and-stamp-duty-when-adding-your-wifes-name

Some comments here:

https://www.accountingweb.co.uk/any-answers/capital-gains-transfer-asset-into-joint-names-before-sale