Gifting a house and CGT.

ThisIsWeird

Hi all.

After reading a couple of threads on here recently about CGT liability even if you move back into your own - currently rented out - property for a year or two, I brought this to the attention of a friend who was considering doing just this. The news didn't go down well...

She has a (second) house that was bought as a BTL around 10 years ago - I don't think she ever lived in it, so it's been rented out all that time. Ultimately it was designed to benefit her two kids when they come of age, and would hopefully provide a house deposit for each as they start their working lives.

Her original intention was to sell her current property (she'll be moving to a different area at some point in any case), and move into the rented one and make it her main residence for as long as she's in the area - probably a couple of years or so. When her children complete their education and get jobs, she would then sell this house and split the purchase price between them, and she'd move closer to other family using the earlier proceeds from her 'main' main house - that sort of thing. However, if she's nobbled for near-full CGT on this rented house, it's unlikely to realise the two deposit sums she was hoping for. This house is worth roughly £280k-ish.

So, I'm guessing that if she sells this house, she be liable for CGT roughly split in the ratio of rent-to-living in, so 5:1? Don't know what she paid for it, but it was when the market was struggling, so I suspect it's gone up comfortably over £100k in value.

What would happen if she 'gifted' the house to her children instead? Would CGT still apply? If so, that would suggest she'd need to find ~£40+k from her savings, as she wouldn't have the sale proceeds from this house to use?

Thoughts, please? Ta.

user1977

Yes, gifting isn't some cunning tax dodge, she'll be liable for CGT based on the value of the property at the time of the gift.

ThisIsWeird

Thanks, User.

More bad news to break... :-)

dimbo61

Well it's not all bad news.
She can of course sell her  Main home and all the profit ( price sold minus outstanding mortgage and selling costs ) is Tax free.
She then moves into her Rental property and either clears the mortgage or take out a residential mortgage.
Live in the property for as long as she  wants and then sells 
She will have CGT to pay 
Still she will save on stamp duty and may own her Rental home outright with No mortgage to pay 

ThisIsWeird

dimbo61 said:

Well it's not all bad news.
She can of course sell her  Main home and all the profit ( price sold minus outstanding mortgage and selling costs ) is Tax free.
She then moves into her Rental property and either clears the mortgage or take out a residential mortgage.
Live in the property for as long as she  wants and then sells 
She will have CGT to pay 
Still she will save on stamp duty and may own her Rental home outright with No mortgage to pay 

Phew - thanks. I might survive the telling, then :-)

If this second house has been rented for 10 years, and she moves back in for, say 2, any ballpark figure for the likely CGT? (I know there are calculators for this, but too much work for me. Just looking for an 'idea' of the tax to pass on.)

Thanks.

dimbo61

Well Capital Gains Tax is 18/28% 
Depends on Income.
Speak to an accountant when the time comes

ThisIsWeird

dimbo61 said:

Well Capital Gains Tax is 18/28% 
Depends on Income.
Speak to an accountant when the time comes

Thanks again Dimbo.

Yes, she's been looking into it, and it doesn't seem as punitive as she first thought - she'd been imagining losing 40-odd% :-)

lika_86

ThisIsWeird said:

dimbo61 said:

Well Capital Gains Tax is 18/28% 
Depends on Income.
Speak to an accountant when the time comes

Thanks again Dimbo.

Yes, she's been looking into it, and it doesn't seem as punitive as she first thought - she'd been imagining losing 40-odd% :-)

Maybe she could reframe this in her mind as rather than losing anything, she has gained equity in an asset due to nothing more than the passage of time and increase in value in the property, so having to pay some tax on wholly unearned income is entirely reasonable, rather than a punitive measure.

theartfullodger

gifting to kids will mean they will very likely have to pay more stamp duty on other future property purchases.

km1500

to calculate the cgt it is easy - just simply go to the government website cgt calculator

basically you take the profit (in this case say 100k), deduct buying and selling expenses and any improvement costs she has done to it (note this has to be improvements are not maintenance)

this leaves her taxable profit. She will pay 18% on the amount between what she earns less personal allowance and the 40% tax band and 28% on anything that falls over the 40% tax band

ThisIsWeird

Thanks all - yes, a first-world problem.

Interesting, km - I know she's spent a fair bit on it while it was rented - a boiler, fencing and decking, that sort of stuff. That's all 'maintenance', then, so not deductible?