Cgt and second home

BlueVinney

Whoops, I think I've missed a trick.

Seven years ago we jointly bought a second home in England for retirement (#1). We rented out the house for two years then retired, moved into #1 as our main and only residence having sold our original property. We lived there for two years.

To protect our retirement income we have since rented out #1 and moved into a new house nearby, which we also bought. Our intent was to use the (current) provisions of cgt allowances to minimise tax implication of the capital appreciation when selling #1. As of current date I believe we will have no cgt liability on the sale.

I have just realised that the 2008 cgt changes will mean a potential liability of 130k (gain) * 18% less personal allowances, around £5.4k.

Is there any way that we can structure our activities so that we can avoid this cost?

Thanks for your thoughts.

Elaine_Wilson

I'm not sure you've got the implications of the proposed changes right but more information is needed.

You have owned the property for seven years. For five of those it has been let and the remaining two (years 3 and 4) it was you own residence. I assume that you were not originally living in job-related accommodation and that the lettings form a chargeable period. The private residence exemption covers the two years you were living there and the last three years, so 5/7ths of the gain is exempt. 2/7ths of the gain is therefore chargeable.

This will not change next April, except that the longer you keep the property the chargeable fraction will slowly increase.

At the moment you are entitled to 25% taper relief and this will disappear next year.

Can you clarify the actual untapered gain. If the increase in the value of the property was £130,000 then I think you are potentially liable on a sale now. 2/7ths of the gain would be £37,143. 75% of this is £27,857. Two annual exemptions add up to £18,400 which leaves £9,457 chargeable to tax at 20% or 40% depending on your other income (i.e. a minimum of about £1,900).

If the proposed new regime was in operation now then you would be paying 18% on £37,143 - 18,400, which is £3,374.

jimmo

Main residence relief is traditionally calculated by reference to months, rather than years. Years are usually too rough.
Elaine_Wilson seems to have got most of it right but has omitted Lettings Relief.
Lettings relief has the following limits
The gain already exempted for main residence
The gain attributable to the period of letting.
£40,000.
Even if you are talking about a Capital Gain of £130,000 for each of you the exempt amounts could be
For occupation (plus last 3 years of ownership) 5/7 * £130,000 = £92875
For letting relief the lowest of
The exempt gain £92875
The gain for the periods of letting £92875
In your example that would be 5/7£92875
The max £40,000.

£92875 + £40,000 = £132875.
Any way around the amount available for exemption exceeds the actual gain and there is no tax to pay.
Just be careful. Do the calculations in months. Publish more accurate details and one of us will do the calculation for you.

Elaine_Wilson

Thanks Jimmo. How could I have forgotten lettings relief?

I've done a good half dozen calculations in the last few months where it applied. Must be excess Christmas spirit.

BlueVinney

Thanks Elaine_Wilson and jimmo for all the help so far.

I've listed the sequence of use during our ownership below. As you see there is another detail of contention, does the period when occupied by our son count as a let or not?

These details are for the period up to 31 March 2008 assuming that the existing tenancy continues

1. Not occupied - 2 months
2. Occupied by son - 12 months
(no formal tenancy agreement but he paid council tax, utilities and and some contribution to our costs.)
3. Let - 24 months
4. Occupied by us - 22 months
5. Not occupied - 1 month
6. Let - 3 months
7. Not occupied - 2 months
8. Let - 40 months (tenants still resident)


With these details could you calculate my tax liability if sold (1) in 2007/2008 tax year and (2) in 2008/2009 tax year?

I very much appreciate your assistance and wait (with bated breath) your conclusions.

Thanks

Malcmandy

We purchased a 2nd home in 2000 which was let as a holiday cottage.
We sold our main home in 2001. Moving our possessions down to the 2nd property, now our main home.
We bought another 2nd home after that, also 2001.
Due to the complete refurbishment of the new main home, we stayed in the 2nd home for over 6 months.
The 2nd home has now been let for 3.5 years.

I would be grateful for any thoughts on the CGT position. Thanx

CLAPTON

BlueVinney wrote: »

Thanks Elaine_Wilson and jimmo for all the help so far.

I've listed the sequence of use during our ownership below. As you see there is another detail of contention, does the period when occupied by our son count as a let or not?

These details are for the period up to 31 March 2008 assuming that the existing tenancy continues

1. Not occupied - 2 months
2. Occupied by son - 12 months
(no formal tenancy agreement but he paid council tax, utilities and and some contribution to our costs.)
3. Let - 24 months
4. Occupied by us - 22 months
5. Not occupied - 1 month
6. Let - 3 months
7. Not occupied - 2 months
8. Let - 40 months (tenants still resident)


With these details could you calculate my tax liability if sold (1) in 2007/2008 tax year and (2) in 2008/2009 tax year?

I very much appreciate your assistance and wait (with bated breath) your conclusions.

Thanks

based on your figure I assume
total period of ownership = 106 months
period of PPR = 22 month
let for = 67 months

gross gain =130,000

so post 6th april 2008

PPR relief is 22 plus last 36 mon ths = 58 months

so gain now reduced to 130,000 x (106-58)/106
=58,867

letting relief = 130,000 x 67/106 = 82,169 but is capped at a maximum of 40,000

so gain reduced to 18,867

If you have always owned the house jointly then you can both use your CGT allowance of 9,200 each so CGT tax is payable on only £447 at 18%.

If only you won the house then you can use only 9,200 so gain will be payable on 9667 at 18%.

If you sell this tax year you can get taper relief in addition.