CGT on buy to let

roadweary

I bought a house around 2007, lived in it for about 2 years, then moved in with my gf (no wife) and rented out the original house.

Now, my main residence with my wife is in both our names as is the original house that is let out.

If sometime in the future, planning for retirement, I wanted to sell the original, rented house, I'd like to minimise the CGT.  I've read some articles on 'flipping' and some seem quite contradictory.

How long would I need to move into the original house to prove it as my main residence, and would my wife also need to do the same?  

Would having the utilities in my/our names be sufficient or is additional evidence required?

Also, the articles suggest that by moving in, they will disregard CGT for the last 3 years of ownership.  For argument's sake, imagine that I sell the house in 2030 after a total of 23 years of ownership.  Does that mean that 3/20 of the capital gain will be ignored....or will I have to demonstrate what the value of the house was in 2027 - 3 years before the sale?

I appreciate it's probably more complicated than that as there might be some allowance for the original 2 years that I live in the house too.

Thanks.

silvercar

Your wife acquires your purchase price and your years of ownership. The gain would be split between you.

The calculation is linear, based on the period of ownership. You are exempt from CGT for the length of time it was your home and the last 9 months of ownership. (It was 3 years but has gradually been reduced over time to 9 months).

So out of 23 years of ownership you would be exempt for 2.75/23 of the gain. You can also take off buying and selling costs.  The gain is the selling price minus the buying price. A notional value along the way is irrelevant.

If you want to move in, you need to do it properly. So changing your address on your driving licence, utilities, council tax, hmrc etc. You and your wife can only have one main residence between you. You gain exemption for the last 9 months in any case, so to make it worthwhile you are going to have to move in for longer than that.

roadweary

Thanks.  I'm not clear about the calculations if we move in.  Once we change our residence, do we get CGT exemption just for the period that we stay there....or once we have stayed in for a certain time period, is there no CGT to pay as it is now our primary residence?

silvercar

roadweary said:

Thanks.  I'm not clear about the calculations if we move in.  Once we change our residence, do we get CGT exemption just for the period that we stay there....or once we have stayed in for a certain time period, is there no CGT to pay as it is now our primary residence?

Only for the period you moved in (+ the last 9 months of ownership if you weren’t there at that time). That’s why it’s only worth moving in if you are going to stay there over 9 months.

sheramber

And the value of the house ny increase during the time you live in it resulting in a bigger gain. 

roadweary

Tbh, I wouldn't move to the house just for the tiny difference in CGT.  I'd hoped if I lived there for 6-12 months I could completely get rid of the CGT, but that's not the case.  

It's definitely not worth the inconvenience, our life is where we live now.  Plus we wouldn't rent out our current family home so we'd be paying two maintain two houses.

So, new question.  The house has been declared as 99:1 ownership in favour of my wife, and she is 20% tax bracket.  Does that mean that 99% of CGT would be paid at her rate of CGT?

But then another article I read suggested that the profit from the house would count as income in the year it is received.  "Basic rate taxpayers need to add any gains from their investment profits to their taxable income, which can push them into the higher bracket. However, if you’re still in the basic tax band after accounting for this, you’ll pay a lower CGT rate."  Is that correct because if it is, she'd end up in the higher tax bracket anyway.

Bookworm105

roadweary said:

So, new question.  The house has been declared as 99:1 ownership in favour of my wife, and she is 20% tax bracket.  Does that mean that 99% of CGT would be paid at her rate of CGT?

hopefully you now understand that the CGT gain is based on the TIME you have owned the property split into the % of time you lived in it as main home and the % of time it was not. The two % obviously adding back to 100%, so no moving "back in" never eradicates CGT entirely, it just reduces the % of the gain that will be taxed. The automatic final 9 months exemption also being a disincentive to play games with moving back short term.


as for the calculation, gf will be assessed as having 99% of the gross gain (selling price - your original purchase price) and her net taxable gain will be net of private residence relief and her £3,000 CGT allowance

for her actual CGT amount payable, it is not as simple as all at basic rate:
a). Excluding the taxable gain, how much is her total income from all other sources? (ie gross income upon which she would eventually pay income tax)
b) Deduct a) from £50,270, how much is left from that?
c) the amount at b) is the amount of the gain which will be taxed at 18% CGT
d) if the taxable gain is more than c) then that excess is taxed at 24% CGT

so when websites refer to income in the year in more technical terms it means:
income subject to income tax less personal allowance (12,570) plus CGT gain less CGT allowance (3000) = ?
if ? is more than £50,270 then that excess is the higher rate CGT amount

£50,270 being: basic rate income tax bracket (37,700) PLUS personal allowance 12,570
(don't double count the personal allowance! Be clear if your start point is gross income or income net of the PA)
hence people get confused as it is not "I'm basic rate income tax payer so I must be basic rate CGT" as the CGT bracket is based on total "income" for that year = net income + net gain   

roadweary

Hi, thanks.  Yes, I'd just kept my head down and kept repaying the mortgage (capital and interest).  In the meantime the whole regime has become much less favourable tax-wise, letting or selling. 

Currently, I'll keep doing the same, and will consider selling should things become easier on tax, should there be a particular peak in house prices....or when she has retired.

Alternatively, if the taxation looks set to become even higher (which I've heard is potentially true) that could also trigger us to look into selling.

All the help is much appreciated.