Capital Gains Tax Minefield

stephen071

First let me say a thank you  to anyone who takes the time to reply to this post. If I have missed any information please let me know and I will do my best to provide it.

I am asking for help regarding Capital Gains Tax which to me seems a a minefield, I do not see how anyone but someone who has experience is supposed to understand it?

A bit of background, I work in the creative industry and am not knowledgeable about tax laws, I also have a brother who suffers with mental health issues i.e. Autism.

I have owned a house for almost 25 years and will be mortgage free in only a few months. 

Around 1994-5 I purchased a small house that was approximately £45,000 it is now worth around £200,000. I made a down payment of I think £7,000 and a got a mortgage for £38,000

I was living in the mortgaged house for around 10 years, at which time my Mother sadly died, she had spent her time as a carer for my brother, they both lived in her council house.

Upon her passing I decided to move in full time with my now wife and let my brother live rent free in my house. He is able to take care of himself for the most part, but can struggle occasionally with the outside world.

Here is the crux. I may be able to take early retirement in a year or two, one of the things being discussed is moving to another part of the country where property is cheaper, or abroad, I will also take my brother if he is willing to come but I do not know what are the implications regarding the house should this happen? 

May I also say that the only improvements made to the property as such is updating the bathroom and kitchen and installing double glazing.

1. If I sell the house would I have to pay CGT and if so does anyone know what this would be?

2. If I gift the house to my brother, is there a period of time that passes where this CGT payment no longer applies should I sell it later.

3. Does anyone have any alternative suggestions for what is best to do? I am in no rush as such to move and unsurprisingly would like to maximize the profit from the property.

AnotherJoe

stephen071 said:

First let me say a thank you  to anyone who takes the time to reply to this post. If I have missed any information please let me know and I will do my best to provide it.

I am asking for help regarding Capital Gains Tax which to me seems a a minefield, I do not see how anyone but someone who has experience is supposed to understand it?

A bit of background, I work in the creative industry and am not knowledgeable about tax laws, I also have a brother who suffers with mental health issues i.e. Autism.

I have owned a house for almost 25 years and will be mortgage free in only a few months. 

Around 1994-5 I purchased a small house that was approximately £45,000 it is now worth around £200,000. I made a down payment of I think £7,000 and a got a mortgage for £38,000

Mortgage is irrelevant in this
I was living in the mortgaged house for around 10 years, at which time my Mother sadly died, she had spent her time as a carer for my brother, they both lived in her council house.
There was a time when you could use that but i;m not sure if that applies any more. Look up
If private residential relief is still around .

Upon her passing I decided to move in full time with my now wife and let my brother live rent free in my house. He is able to take care of himself for the most part, but can struggle occasionally with the outside world.

Here is the crux. I may be able to take early retirement in a year or two, one of the things being discussed is moving to another part of the country where property is cheaper, or abroad, I will also take my brother if he is willing to come but I do not know what are the implications regarding the house should this happen? 

May I also say that the only improvements made to the property as such is updating the bathroom and kitchen and installing double glazing.

1. If I sell the house would I have to pay CGT and if so does anyone know what this would be?

Worst case 200-45 plus say 5 costs) gain ,  so 150k. CGT on a gain of 150k = maybe close to £50k but look here and decide yourself https://www.which.co.uk/money/tax/capital-gains-tax/capital-gains-tax-on-property-avuq96u1500f

If private residential relief applies it might be half that.

2. If I gift the house to my brother, is there a period of time that passes where this CGT payment no longer applies should I sell it later.
CGT becomes liable at the point you pass it to him (even if you gave it to him) so you'd be worse off as at least if you make £150k you can pay out £50k but not (perhaps) if you dont make £150k because you gave the house away.
3. Does anyone have any alternative suggestions for what is best to do? I am in no rush as such to move and unsurprisingly would like to maximize the profit from the property.

Just sell it and be done with it. You've still made a good profit.

oldbikebloke

stephen071 said:

1. If I sell the house would I have to pay CGT and if so does anyone know what this would be?

2. If I gift the house to my brother, is there a period of time that passes where this CGT payment no longer applies should I sell it later.

3. Does anyone have any alternative suggestions for what is best to do? I am in no rush as such to move and unsurprisingly would like to maximize the profit from the property.

Background facts
- you own a property that you have not personally lived in for 15 out of the 25 years you have owned it 
- you got married and are living in the martial (main) home for the last 15 years. Does that tie in with the actual date you got married? If not, then she owned a property, and you owned a property, only one of them is the exempt "main" home and which one it is will be a matter of facts as to where you were physically living at the time .
The rules 
- if it is not your main/ only home then you are liable for CGT when you "dispose" of it (sell or gift)
- a married couple can have only one main (exempt) residence between themselves. That is (normally) the one they live in together.

Answers to your Qs
1. Yes you will pay CGT.
owned 25 years, not lived in for 15 years which we will (for sake of simplicity) assume ties in with the marriage date .
exempt main residence 10/25 = 40%
CGT liability: 
Gross gain = selling price (assume) 200k less purchase cost 45 = £155,000
we will ignore your assertion that you "refurbished" the kitchen, bathroom and double glazing as such items are categorically not capital costs since they are all replacement of what was there already with a "better" item and therefore are not installation of of an items that did not exist before. Double glazing is now categorically an example of a "non capital" cost.
NOTE I have ignored costs you can deduct such as: i) legal fees paid on purchase, ii) legal fees paid on sale, ii) estate agent fees paid on sale. With an original purchase cost of 45 in "1994-5" (surely you know the actual date?) you would not have paid SDLT at that time so we will ignore that.

you are given Private Residence Relief (PRR) for the 10 years it was your (pre marriage?) main home. On that basis you are additionally entitled to the "final" 9 months of ownership as "deemed" occupation irrespective of the fact you were not actually living there. Note carefully, the calculation must be done in months, not years (you can also choose to use exact days if you wish). I will stick with months for sake of simplicity, so PRR period = (10 years x 12 + 9) "occupation" / (25x12) total ownership = 43%
PPR therefore 155,000 x 43%  = £66,650
It appears you are sole owner, so the CGT liability is yours alone. I will also assume in the tax year of sale you have no other capital gains at all, on which basis you are entitled to claim the £12,300 (20/21 tax year rate) CGT allowance meaning your CGT net taxable gain will be 155,000 - 66,650 - 12,300 = 76,050

The amount of CGT you will actually pay depends on how much earnings you have in that tax year. For example, if you have an employment salary of £30,000 you deduct your (income tax) personal allowance £12,500 thus leaving 17,500 taxable income. To that you add the net taxable CGT 76,050 so giving a "total income" for the year of £93,550
Against that, the higher rate tax bracket starts at 37,500, so in this made up example you will pay CGT as follows:
@ 18% on (37,500- 17,500) = 20,000 x 18% = 3,600
@28% on (76,550 - 20,000) = 56,550 x 28% = 15,834
total CGT payable £19,434 funded from the sale proceeds of £200,000

2. Can I suggest you revisit the illogicality of what you wrote. If you gift the ownership to brother, then how can YOU possibly sell it at a later date when you are no longer its owner...?
You and brother are "connected persons" (simplistically: "relatives") therefore a gift to him is a disposal by you and triggers immediate CGT liability for you using the market value of the property at the date of gift (if that is 200k see calculation above). Note you have 30 days from the date of transfer in which to physically pay the CGT to HMRC so for a gift whereby your sibling gives you no cash in return can you find £19,434 of your own cash to pay to HMRC? If not, you have a problem!
Brother's mental incapacity is utterly irrelevant.

3. no alternatives.
You have a net gain, the tax you will have to pay is not at 100%, so you will still make a "profit" 
In simple terms you are gambling....
- tax rules do change, eg: letting relief has recently been abolished so some people now have (up to) £40,000 which is additionally subject to CGT that previously was not.
and
- house prices rise faster than tax rates change and/or inflation erodes the "value" of money