Capital gains tax - acquisition cost

Lalaa83

Hi All, 

Need assistance in calculating the acquisition cost of a property. Property was bought jointly with a friend in 2012, at a cost of £100k, each owned 50%. Both lived in residence for this whole period of time as main residence. 5 years later in 2017, friend wanted to move, so got property revalued, was determined to be worth £132k, so paid friend £16k lump sum and took over mortgage in my own name. Continued to live in the property as main residence until 2020. During 2020, got married and moved in with wife, so let out this property until it was sold in 2022. Know I will be entitled private residence relief, but need assistance in determining the actual acquisition cost of the property. Is the ownership deemed just to have started from the point at which I became a full owner in 2017 or does the period when was a 50% owner count?

Should also say I am based in Northern Ireland, in case that impacts. 

I have asked hmrc but got a couple of different responses.

One said that I should only count fom when I wholly owned the property, so acquisition cost would be 132k.

Another said l to take 50% of the initial market value (100k) which would be 50k and add to the market value when bout wholly which is 132k.  Which would give me a acquisition cost of 182k. 

Not sure either of these are correct.

Appreciate if anyone could shed any light on this.

Thanks

[Deleted User]

Some of the advice from HMRC leaves a lot to be desired. Your outlay was £50000 plus half of the mortgage balance at transfer plus £16000. How can that be £132000, never mind £182000?

I am happy to be corrected but I would be calculating based on the two ‘halves’ of the property and showing the disposal of each half separately. 

First half - acquisition cost £50000 plus half of associated costs. Period of ownership (let’s say June 2012 to June 2022) 120 months. Main residence to (say) June 2020 which is 96 months plus 9 months as it was your main residence at some point. Private residence relief is 105/120 of the gain. The gain is half (selling price less £50000 less costs of purchase and sale). 

Second half - acquisition cost (say June 2017). This would surely be half of the mortgage balance at the time of transfer plus £16000 (let’s call it £48000 plus £16000 = £64000)  Period of ownership is 60 months. Main residence for 36 months (to June 2020). Private residence relief (add 9 months) is 45/60 of gain. The gain is half (selling price less £64000 less half costs of sale only). 

That’s how I would do it - two separate disposals. It’s an interesting question and I am sure that others on here may adopt a different approach. Regardless, I would ignore the advice from HMRC.

There is the possibility that there is no tax to pay, obviously depending on sale price and costs. If so, and you don’t normally submit a tax return, there is no need to declare it. 

Jeremy535897

They are not correct. Your base cost is what you paid, which appears to be as follows:
50% of original cost, £50,000, plus £16,000 lump sum paid to friend, plus the amount of friend's mortgage taken over, which I am assuming was £50,000? That would give a base cost of £116,000. Northern Ireland is no different from anywhere else in the UK on this matter. The market value in 2017 is irrelevant, except that it was used to calculate the amount you paid for the other half of the property.

Your ownership period is 2012 to 2022, and the period you occupied the property as your main residence, plus the last 9 months, will be the exempt proportion. As an example, if you bought the property in June 2012 and sold it in June 2022, that is 120 months of ownership, and 105 months are exempt. If the property was sold for £200,000, the taxable gain would be £200,000 - £116,000 = £84,000 x 15/120 = £10,500. You can also deduct your share of acquisition costs (including the costs arising when you bought your friend's share), any qualifying improvements, selling costs, and your annual exemption of £12,300, if not used elsewhere. If there is still a tax liability, see:
https://www.gov.uk/report-and-pay-your-capital-gains-tax/if-you-sold-a-property-in-the-uk-on-or-after-6-april-2020

[Deleted User]

Jeremy535897 said:

They are not correct. Your base cost is what you paid, which appears to be as follows:
50% of original cost, £50,000, plus £16,000 lump sum paid to friend, plus the amount of friend's mortgage taken over, which I am assuming was £50,000? That would give a base cost of £116,000. Northern Ireland is no different from anywhere else in the UK on this matter. The market value in 2017 is irrelevant, except that it was used to calculate the amount you paid for the other half of the property.

Your ownership period is 2012 to 2022, and the period you occupied the property as your main residence, plus the last 9 months, will be the exempt proportion. As an example, if you bought the property in June 2012 and sold it in June 2022, that is 120 months of ownership, and 105 months are exempt. If the property was sold for £200,000, the taxable gain would be £200,000 - £116,000 = £84,000 x 15/120 = £10,500. You can also deduct your share of acquisition costs (including the costs arising when you bought your friend's share), any qualifying improvements, selling costs, and your annual exemption of £12,300, if not used elsewhere. If there is still a tax liability, see:
https://www.gov.uk/report-and-pay-your-capital-gains-tax/if-you-sold-a-property-in-the-uk-on-or-after-6-april-2020

I am happy to take your word for it but, are you sure that this is the correct approach? On the purchase of the second half there is a lower proportion of PPR as main residence for only two years out of five. Moreover, why should the op assume the PPR of his friend’s half of the house? Am I overthinking this?

On the first half, using £200000, we have a gain of £100000 less £50000 less PPR 43750 = £6250. 

On the second half it’s £100000 less £66000 less PPR 25500 = £8500.

Total gain - £14750.

As I said, happy to be corrected but I can’t see how you can claim PPR based on the whole of the house for ten years when you only owned half of it for five years.

Keep_pedalling

Was the equity only £32k when you bought out the friends share? I would have thought it would be more unless you had a 100% interest only mortgage. 

[Deleted User]

Keep_pedalling said:

Was the equity only £32k when you bought out the friends share? I would have thought it would be more unless you had a 100% interest only mortgage. 

Is the cost of buying out not £16000 (value increase) plus half of the outstanding mortgage - whatever that was? 

Jeremy535897

purdyoaten2 said:

Jeremy535897 said:

They are not correct. Your base cost is what you paid, which appears to be as follows:
50% of original cost, £50,000, plus £16,000 lump sum paid to friend, plus the amount of friend's mortgage taken over, which I am assuming was £50,000? That would give a base cost of £116,000. Northern Ireland is no different from anywhere else in the UK on this matter. The market value in 2017 is irrelevant, except that it was used to calculate the amount you paid for the other half of the property.

Your ownership period is 2012 to 2022, and the period you occupied the property as your main residence, plus the last 9 months, will be the exempt proportion. As an example, if you bought the property in June 2012 and sold it in June 2022, that is 120 months of ownership, and 105 months are exempt. If the property was sold for £200,000, the taxable gain would be £200,000 - £116,000 = £84,000 x 15/120 = £10,500. You can also deduct your share of acquisition costs (including the costs arising when you bought your friend's share), any qualifying improvements, selling costs, and your annual exemption of £12,300, if not used elsewhere. If there is still a tax liability, see:
https://www.gov.uk/report-and-pay-your-capital-gains-tax/if-you-sold-a-property-in-the-uk-on-or-after-6-april-2020

I am happy to take your word for it but, are you sure that this is the correct approach? On the purchase of the second half there is a lower proportion of PPR as main residence for only two years out of five. Moreover, why should the op assume the PPR of his friend’s half of the house? Am I overthinking this?

On the first half, using £200000, we have a gain of £100000 less £50000 less PPR 43750 = £6250. 

On the second half it’s £100000 less £66000 less PPR 25500 = £8500.

Total gain - £14750.

As I said, happy to be corrected but I can’t see how you can claim PPR based on the whole of the house for ten years when you only owned half of it for five years.

purdyoaten2 said:

Keep_pedalling said:

Was the equity only £32k when you bought out the friends share? I would have thought it would be more unless you had a 100% interest only mortgage. 

Is the cost of buying out not £16000 (value increase) plus half of the outstanding mortgage - whatever that was? 

Dealing with the second post first, the increase in value of the house was £32,000. As OP only paid £16,000, that implies that the house was acquired with a 100% interest only mortgage of £100,000. OP paid £50,000 in 2012, assumed the £50,000 mortgage in 2017, and paid £16,000. That totals £116,000, although I did point out that this is an assumption.

As to the point about main residence relief, if you have an interest in a main residence, and you increase that interest whilst it is still your main residence, that increased interest is deemed to be acquired at the date the original interest is acquired for the purpose of calculating main residence relief. See the first part of section 222(7) TCGA 1992:
"In this section and sections 222A to 226, “the period of ownership” where the individual has had different interests at different times shall be taken to begin from the first acquisition taken into account in arriving at the expenditure which under Chapter III of Part II is allowable as a deduction in the computation of the gain to which this section applies..."

[Deleted User]

On the first point, Yes, I agree. I used £114000 as I had assumed half the mortgage value at transfer of £48000 as opposed to your figure of £50000.

On the second point - great information and not that which I have encountered. Thank you. 

Lalaa83

Grateful for all of the advice on this, it is much appreciated.  Much more valuable than any direction provided by hmrc, their approaches were totally illogical. 

Having done all the calculations, there is no need to report a capital gain in this one.

Thanks again