Please explain Capital Gains Tax

Mim_2

10 years ago my mother transferred ownership of her house to my sister and I. We didn't have any valuations done, and as she owned the house outright, we simply transferred the land registry details into mine and my sister's names. She was supposed to go to live with my sister, but for various reasons didn't end up doing it. She has lived in the house ever since paying all utility bills but no rent, and my sister and I continued to own it.

Last year my mum moved into a flat and the house has been empty since last May. We now have a buyer for it and the sale should be completed within the next 2 weeks. Although my mum is not legally an owner of it, we intend to split the money 3 ways with her.

My sister and I don't understand how Capital Gains Tax will work. We both work paying basic rate tax and both own our own family homes. Our husbands both pay tax - mine at the higher tax rate of 40%. I don't know whether they come into the equation at all.

Mum's house is selling for £80,000. How do we work out what the Capital Gains Tax will be? And to minimise what we have to pay. I asked my solicitor's secretary today and she wasn't sure as it's not work they do.

I've looked on the internet for info, but it's all so confusing.

Hope someone can help!

CLAPTON

The simplest way of reducing CGT is to give your husband half your share but this must be done before the sale (i.e. before exchange of contracts) as then you can use their CG allowance... but maybe this is too late?

As an example CGT would work this way

suppose value 10 years ago was 30,000
sale today 80,000
gross gain 50,000
you can deduct cost of sale ...say 2,000
so gain 48,000
get 40% taper relief
so gain now 28,800

now your share is 14,400
you have a CGT allowance of 9,200
so taxable amount is 5,200

this amount is added on top of your income and taxed at 10, 20, 40% depending
so you will probably pay at 20% so tax = £1,040

however, if you gave half to your husband then he could use his 9,200 so no tax would be payable. (but this must be done before exchange of contracts).

Things to note:
a. this assumes you exchange before 5th April... the rules change then. After that it would cost you about 2,664 in tax on the same assumptions.

b. the calculation depends upon the assumed price of acquisition...this can be a very difficult area as the HMRC might take the view that the house's worth was reduced as it had a sitting tenant i.e. your mother)

Mim_2

Thanks for the reply - and easy to follow!

I don't think we'll be able to transfer some to my husband as we're trying to complete by next Friday as my sister then goes away on holiday for two weeks, and we also go away the following week. It's better than I thought though as I didn't know about the 40%.

I checked on some house price websites and houses in my mum's street sold for an average of £36k at the time so your figure of £30k might be pretty correct taking in to account that my mum was a sitting tenant.

Mim_2

Forgot to ask - when the sale is made, will we automatically receive a CGT bill or do we have to notify someone?

dzug

Mim wrote: »

Forgot to ask - when the sale is made, will we automatically receive a CGT bill or do we have to notify someone?

You have to tell the taxman

silvercar

Include it in your tax return for 2007-08, return to be submitted and tax paid by January 2009.

Mim_2

Okay, thanks.