Capital Gains Tax Query on Rental Property

Mrcsmrs

Hi, just wondering if anyone can help with some basic advice please? 
My parents are set to move in with us in the near future and they have decided they want to keep their house and rent it out. This is so that if they feel they don’t want to live with us they’ll have somewhere to go back to, but also to give them a small income too. My concern is that if they do eventually decide to sell the house, they might end up liable for CGT on the sale. Is this the case and is there anything we can do to mitigate any losses here? They’re both just turned 70 and have been very careful with their money all their lives so I don’t want them to lose out on their biggest asset just because they’re moving in with us.
It’s also the case that if they were to ever need nursing home care, they’d be able to afford to be somewhere nice. In case it matters they’ll be paying income tax on their rental income from the house and aren’t paying anything other than utilities for living with us. 

Thank you. 

Jeremy535897

It depends on how long they have lived there. For example, a married couple living together who bought a house as a main residence 30 years (360 months) ago for £100,000 and sold it after renting it out for 2 years (384 months total ownership) for £600,000 would have the following capital gain:
Gross gain £500,000
Exempt main residence 360 months plus last 9 months  so 15 months out of 384 chargeable = £19,531, which would be covered by annual exemptions (unless there were other gains).

Mrcsmrs

Jeremy535897 said:

It depends on how long they have lived there. For example, a married couple living together who bought a house as a main residence 30 years (360 months) ago for £100,000 and sold it after renting it out for 2 years for £600,000 would have the following capital gain:
Gross gain £500,000
Exempt main residence 360 months plus last 9 months  so 15 months out of 384 chargeable = £19,531, which would be covered by annual exemptions (unless there were other gains).

Thank you, they have lived there for over 40 years, I think possibly as many as 45 years. I think I’ll suggest they get a FA to take a look. Am I right in thinking that the CGT is based on the increase in value of the property whilst they’re renting it? Could you tell me how much annual exemptions are? Apologies for the questions, it’s a whole new area for us all!

Jeremy535897

No, the gain is from the date they bought it, to the date they sell it. The gain is deemed to accrue evenly over time, and the time it is their main residence, plus the last 9 months of ownership, is exempt. That's what my example shows. You will note I make no mention of the value of the property at the date the property stops being their main residence in my example in the previous post. The current annual exemption for capital gains tax is £12,300, so £24,600 for a jointly owned property, unless the exemptions are used elsewhere.

If a taxable gain arises, it has to be reported within 30 days of completion, and the tax is payable by then.

EDIT: If the property was bought before 31 March 1982, it is the value at that date rather than original cost that is used to calculate the capital gain.

Mrcsmrs

Jeremy535897 said:

No, the gain is from the date they bought it, to the date they sell it. The gain is deemed to accrue evenly over time, and the time it is their main residence, plus the last 9 months of ownership, is exempt. That's what my example shows. You will note I make no mention of the value of the property at the date the property stops being their main residence in my example in the previous post. The current annual exemption for capital gains tax is £12,300, so £24,600 for a jointly owned property, unless the exemptions are used elsewhere.

If a taxable gain arises, it has to be reported within 30 days of completion, and the tax is payable by then.

Thank you. I’d just meant that the tax would only be applied to the period of time it had been rented out, less the 9 months you mention, but I didn’t realise the gain would be averaged rather than the actual figures. Makes sense. Thank you for explaining it. I’ll make sure they’re aware and get someone to advise them in full. It’s definitely not my area of expertise at all. 

Jeremy535897

Mrcsmrs said:

Jeremy535897 said:

No, the gain is from the date they bought it, to the date they sell it. The gain is deemed to accrue evenly over time, and the time it is their main residence, plus the last 9 months of ownership, is exempt. That's what my example shows. You will note I make no mention of the value of the property at the date the property stops being their main residence in my example in the previous post. The current annual exemption for capital gains tax is £12,300, so £24,600 for a jointly owned property, unless the exemptions are used elsewhere.

If a taxable gain arises, it has to be reported within 30 days of completion, and the tax is payable by then.

Thank you. I’d just meant that the tax would only be applied to the period of time it had been rented out, less the 9 months you mention, but I didn’t realise the gain would be averaged rather than the actual figures. Makes sense. Thank you for explaining it. I’ll make sure they’re aware and get someone to advise them in full. It’s definitely not my area of expertise at all. 

See the edit I posted on my earlier post about 31 March 1982.

Mrcsmrs

Jeremy535897 said:

Mrcsmrs said:

Jeremy535897 said:

No, the gain is from the date they bought it, to the date they sell it. The gain is deemed to accrue evenly over time, and the time it is their main residence, plus the last 9 months of ownership, is exempt. That's what my example shows. You will note I make no mention of the value of the property at the date the property stops being their main residence in my example in the previous post. The current annual exemption for capital gains tax is £12,300, so £24,600 for a jointly owned property, unless the exemptions are used elsewhere.

If a taxable gain arises, it has to be reported within 30 days of completion, and the tax is payable by then.

Thank you. I’d just meant that the tax would only be applied to the period of time it had been rented out, less the 9 months you mention, but I didn’t realise the gain would be averaged rather than the actual figures. Makes sense. Thank you for explaining it. I’ll make sure they’re aware and get someone to advise them in full. It’s definitely not my area of expertise at all. 

See the edit I posted on my earlier post about 31 March 1982.

Ok, just seen that and yes, I’ve checked with them and they bought it in 1975. Now wondering how we go about finding out what the value was in March 1982! Off to Google I go. Thank you very much for your help. 

Jeremy535897

For a proper computation a RICS surveyor will need to value the property, but there is the Land Registry statistical site and various other building society etc sites to give a rough idea for planning purposes.

Mrcsmrs

Jeremy535897 said:

For a proper computation a RICS surveyor will need to value the property, but there is the Land Registry statistical site and various other building society etc sites to give a rough idea for planning purposes.

That’s great, thank you very much. 

jim_walton

I have probably not read this properly but if the house is their principal residence then CGT won’t be payable.  

Mrcsmrs

jim_walton said:

I have probably not read this properly but if the house is their principal residence then CGT won’t be payable.  

It has been their principal residence for the last 45 years but won’t be when they move in with us and it is let to a tenant. They will eventually need to sell it, but not to buy another residence as they’re going to be living with us. 

For some reason I had thought it was okay to sell within 3 years of moving out of it but I’m not sure why or where I got that idea hence asking in here.