capital gains tax,how do avoid it..

deano72_2

recently bought a house,done it up & rent it out.
now iv decided to sale it.ok bought it for 121k & now been offered 140k.
not sure if im rite,but to avoid it do i have to live in it for 6mnths to avoid the tax,if i dont decide to live in it,how much tax would i have to pay.
thanks for replies,o if u reply pls reply in laymens terms !

CLAPTON

the law is due to change in April 2008 so the amount of tax depends when you sell it

if you sell it after april then it works like this

gross gain is 140k-121k = 19k
less buying and selling costs
less costs of improvements
so if these were 5k then your gain would then be 14k

you have a 9.2k personal allowance, if you're married then you can give half the house to her and use her 9.2k allowance so there would be no tax to pay.

however if you're not married the your taxable gain would be 4.8k
on which you pay 18% = £864

if you sell before April its a bit more complicated... but if you have bought recently then it follows the same principles but you are taxed at 10%, 20% or 40% depending upon your income (basically the gain is added to your income and you're taxed at those rates)


If you live in it as your home for a reasonable time (6 months is often quoted) then the last three years of gain is discounted so you would pay no tax.

Also if you want to give half to your wife you must do this before selling otherwise you wont make any saving (it might not be worth it anyway depending how much it costs to do that)

fengirl_2

To add to what has been said about living in the house, the 6 month thing is a myth. HMRC would look at the quality of your residence in the property, not the length of time you live in it. This would include whether you had informed your bank, building society, employer of the move, whether you had registered to vote there and had utilities put in your name.

deano72_2

thanks for replys.
here is some more info,
bought it in aug,spent approx 6k on it but not kept receipts + borrowed some of the stuff from my dad (hes builder).rented it out in mid sept to friend.now i think to avoid the tax (if its worth it)i could regester all my details bank/work/ and the rest to the address & also put the bills in my name but not actually live there.but mite not be worth it if the tax i have to pay is approx £800.im single no wife/kids & looking to sale to my mum in aug 08,hopefully this will help with the Q

Murdina

As fengirl says, it is quality that counts. She is giving you a flavour of the sort of points that matter. It is not a case of put all the bills there but do not move in. You must actually have made that place your residence. You also need to bear in mind that HMRC CAN argue that a property bought with a view to resale at a profit is not due PPR. From the facts you give, you might have an argument on your hands now to say you did not in fact just buy it to make some money.
You also mention you have now had an offer. I think that totally scuppers you anyway. There is a tax case somewhere about a situation like that; some guy bought a house which was intended to be family home but it did not come off and they sold it again. He was not given PPR.
I think you have a CGT liability whatever you do if the current offer proceeds to completion. From what I read of the housing market, I would be grateful to resell at all and make any money at all. The outlook does not seem very promising!

Murdina

Just a further thought - do you own another house? If so, and you genuinely use both as your home, you need to elect which is to be your home within 2 years of buying the second one - otherwise HMRC can decide on the facts. You have to weigh up the pros and cons as to which to go for, since you don't get relief on both. So if you were to elect for this new place and ended up getting full relief then fine but that would mean that for a corresponding period your present home would NOT get that relief - so there would be tax to pay when you moved out of that one. Just another point to bear in mind. It's far from being a straightforward relief this one.

deano72_2

"It's far from being a straightforward relief this one." tell me about it.
well intended to buy it to keep it,but mum fell in love with it & wants to live there,anyway not that the tax man has to belive that.if its going to cost me 1k in tax & saves on hassle & paperwork fair enough il pay it,but if its going to cost me a fortune & meens getting ripped off by the taxman,then not fair enough,as i said long as on paper it looks like it my main resisdance for the the required time it takes to loose the tax i cant really see the problem,i knew someone who built lovely house with intension to resale but he had to live in for a yr to avoid 100k + taxbill so thats what he done.

takoo

Hi Deano72

Do you have a strategy in mind?

What do you intend to do with the net proceeds from the sale?

If you buy another house and do it up and sell and if you repeat again and again...you will probably be treated as a dealer or trader.

Income taxation will probably arise (unless you make losses).

If you intend to make your success a business formula you could usefully sit down and work out a business plan as a developer. Talk it through with your father.

Good luck

takoo