Capital gains when selling a 2nd property??

helptheden

Hi,
I am hoping that someone can provide some advise about Capital gains tax (with regards to selling a second property). About 10 years ago while I was living at my parents house, my Nan bought her council house under the right to buy scheme. I gave her the money to buy the property and after three or four years the property was then transferred to my name and my Nan continued to Live in the property rent free.

I have since moved out from my parents and have bought a property with my wife (joint owners). My nan recently passed away, the property is now empty. My feeling at the moment for various reasons is that I would rather sell the property than get in the renting game. However, I do not really know where I stand with regards to capital gains tax or where I can go to get advise on this?

Since the property was changed over to my name (and before), I have not lived at this property or had any income from the property. I have paid the yearly service charges on the property. There is no mortgage on the property.

I am hoping someone may be able to provide some advice as to whether I would have to pay capital gains tax if a were to sell this property, and if so what percentage this would likely be? Also, whether there are ways around paying this Tax ie transfer my other property to my wife’s name only? Which would result in me only owning 1 property?

Thanks in advance..

silvercar

Any CGT calculation is based on the increase in value of the property between when you bought it and when you sell it.

The selling price is easy.
The price when you first had a financial interest in the property is harder. You need to find the open market value of the property when you first transferred it into your name and then discount it for the fact that it had a sitting tenant (effectively) paying no rent. There are acturial tables that can do this, though I don't know how you would access them, basically it would be based on the age of your Nan at the time you took over the property.

Assuming you get this value, you then take the difference less buying and selling costs and any improvements (but not maintenance) and the remaining amount is liable for CGT.

If you exchange before 5 April 2008, you would have 40% taper relief and pay tax at your marginal rate. If you exchange after 5 April you pay tax at 18% on the gain.

You have a CGT allowance, currently £9,200. If not used elsewhere you can use this. If you transfer the property to joint names before exchange, you can both use your CGT allowances and may have different marginal tax rates. Whether the legal costs in transferring the ownership offset the tax depends on the size of the liability.

silvercar

To answer your question, a husband and wife can only own one property between them in most circumstances.

neverdespairgirl

There might also be some inheritance tax to pay, because your grandmother transferred the place to you.

silvercar

neverdespairgirl wrote: »

There might also be some inheritance tax to pay, because your grandmother transferred the place to you.

If the transfer was over 7 years ago it will be out of the estate. If less than 7 years ago then it may be considered a PET (potentially exempt transfer) and there may be a marginal amount of tax. To be honest I didn't consider this because the value of an ex- council home 7 years ago would be well under the £300,000 threshold and the chances of someone of that age with no other property (I presume) having a sizeable estate is small.

helptheden

Thanks silvercar for your help and advice.. I have never been involved in this type of thing before and am clueless...I appologise! I am hoping you or someone else could answer a couple of questions regarding your first response (see below).

The price when you first had a financial interest in the property is harder. You need to find the open market value of the property when you first transferred it into your name and then discount it for the fact that it had a sitting tenant (effectively) paying no rent.
If I was to sell the property, is it the taxman’s responsibility to find out this value? Or do they just validate the figures I would provide. I presume I could find an average price for a similar property during the year that the property was transferred to come up with an open market value, I presume that this would be based on open market value rather than the price that my Nan bought the property off of the council..

There are acturial tables that can do this, though I don't know how you would access them, basically it would be based on the age of your Nan at the time you took over the property.
Again, is this something, as the seller, I would be responsible for calculating? Or would the taxman do this? Sorry if this question is stupid!!

Assuming you get this value, you then take the difference less buying and selling costs and any improvements (but not maintenance) and the remaining amount is liable for CGT.
Can I use improvement costs from the date the property was in my name? or cost within the past tax year? I have paid for a kitchen and decorating a couple of years ago and intend to improve the windows and bathroom before selling. Can I subtract this from the taxable amount.. Some of the improvement work was done by family or friends, therefore, I may not have an invoice for all work completed, I presume, I can’t include any such work?

If you exchange before 5 April 2008, you would have 40% taper relief and pay tax at your marginal rate. If you exchange after 5 April you pay tax at 18% on the gain.
I’m not sure if I understand this. Does this mean that if the exchange happens before 5 April, 40% of the profit would be relief ie not taxed, and the remain 60 % would be taxed at my marginal rate (40%). For example if the difference between the buy and sell was 100,000 – I would receive 40,000 tax free and 60,000 taxed at 40%?, whereas after the 5 April, I would pay 18% on 100,000.

You have a CGT allowance, currently £9,200. If not used elsewhere you can use this. If you transfer the property to joint names before exchange, you can both use your CGT allowances and may have different marginal tax rates. Whether the legal costs in transferring the ownership offset the tax depends on the size of the liability.
Am I right in thinking that if I change the ownership to joint names, we could use £18,400 CGT allowance, I am currently taxed at 40% and my wife at the lower rate. Does the point about marginal tax rates not apply after the 5th April ie we would pay 18% on taxable amount (after the CGT allowance has been deducted? Is there any other costs (other than legal costs) in transferring the ownership (other taxes that my wife might be liable for?)

Again, Thanks for you help. I expect that if I decide to sell the property, It would be best to get a qualified person to sort the tax issues out, this is a really silly question…but here goes…Is it best to go to an accountant/financial advisors or a solicitor for this sort of thing?

Tassotti

Tax is a complicated thing...Speak to a recommended ACCOUNTANT

simpywimpy

I am in a similar situation in that my dad owns my house that I live in . When we came to want to transfer it to me, it was then that we heard about CGT and couldn't transfer it to me because of the bill we would face.

I visited an accountant as the solicitor didnt really know but I do remember them saying that you couldn't claim for improvements, just wear and tear (we had just paid 20k on an extension at the time)

For anyone in a similar situation to mine, it's better for the owner to leave it to the person in their will. Had your nan done that, you wouldn't have had any tax bill at all.

Tassotti

simpywimpy wrote: »

I visited an accountant as the solicitor didnt really know but I do remember them saying that you couldn't claim for improvements, just wear and tear (we had just paid 20k on an extension at the time)

I'm not an accountant, but I think you can claim for improvements for CGT purposes. Wear and tear relates to furnished rental properties.

Tass

silvercar

To answer some of your questions in post 6:

Under self assessment you would provide figures and the revenue can accept them or decide to enquire into them. Your starting point would be the open market value, in fact I might be tempted to use that figure and wait to see if the revenue dispute it.

For improvements you can count anything that you paid for, since you owned it. If you don't have receipts I would be tempted to include the figures, the revenue can always throw them out.

Distinguish between maintenance (repair and replace) and improvements. A kitchen update would be maintenance unless there was no fitted kitchen in the first place. Windows are also not improvements, there is even a special rule stating that replacing single glazing with double glazing is still maintenance.

On the tax rules, if you exchange before 5 April, you have 40% taper relief so (at 40% marginal rate) you pay 40% of the 60% = 24%, after 5 April you pay 18%.

If you transfer half to your wife before sale, you would get 18,400 CGT allowance. You would then pay 24% on your half and she would be paying 20% of the 60% until the point where her asic allowance is utilised and the remainder at 40%.

After 5 April, you would be both be paying 18% but would be gaining the 2 CGT allowances. Unless you have some particular unusual circumstances, I cant think of a reason not to transfer half, provided you make sure it is done before exchange and you trust your wife!

I am no expert, so do consider taking professional advice. No harm in contacting your tax office for their input.