Capital Gains Tax question

Buggins

Hi folks,
Can any one help with the following - would be so grateful.

Situation:

• A house is bought in 1996 for £78,000 and lived in by the owner as the sole residence until 2002. In 2002 the owner wishes to buy another house and to sell the original house to a family member for the full market value of £170,000.
• A deposit of £40,000 is paid and a private contract is signed by the owner and family member.
• The family member has difficulty selling their own property so the owner is advised to take out a Buy-to-Rent mortgage of £135,000 in order to purchase the new house.
• Tenants are found and the rental covers the mortgage repayments.
• Legal problems delay the sale of the family member’s house until January 2006.
• Sale to the family member is completed and the mortgage repaid in Jan 2006.

Question:
Is the owner liable for Capital Gains Tax on the sale of the original house?

Your thoughts would be gratefully received.
Thanks
Buggins

fengirl_2

The period from 1996 to the date the owner moved out is exempt. The final 3 years of ownership are also exempt. The gain over the period of letting is chargeable, but will be exempt if it does not exceed £45,000. The mortgages are a red herring.
If the final sale was not at market value, this could be considered not to be an arms length transaction, so HMRC might rule that the sale value was whatever the open market value was at Jan 2006 - assuming the value had increased from 2002.

Buggins

Hi Fengirl,
Thanks for reply - if the contract and price was agreed and the deposit taken initially, does this make a difference? It was unfortunate that the contract was "frustrated" due to .... circumstances beyond their control!
Thanks
Buggins

fengirl_2

I dont think so - house prices can be changed before completion.
Surely it doesnt make any different to the answer - I have heard of very few cases where CGT is due on a let property in these circumstances.

Buggins

Thanks again Fengirl, You have been a great help.
Buggins

silvercar

On other threads (and on HM websites) the date of exchange of contracts is the crucial date. This would mean the house was sold within 3 of it being the PPR and no CGT due.

Buggins

Hi Silvercar
Thanks for your response - sorry to show my ignorance but what is PPR?
Buggins

silvercar

principle private residence.

Buggins

Thanks Silvercar!

jimmo

Under “normal circumstances” the date of exchange of contracts is the date of disposal for Capital Gains Tax purposes.
However it doesn’t sound as if the family members actually exchanged contracts because he has referred to them signing a private contract.
So, this is an unusual situation, especially so because, if the private contract is legally valid there has been a delay of 3 - 4 years between the making of the contract and completion.

The taxman in me now asks how did the first owner manage to get a (buy to let) mortgage on a property he has already legally sold.
When he applied for the (buy to let) mortgage did he hide the existence of the private contract of sale and obtain the mortgage fraudulently?
When the sale actually went through did they go through the usual process of exchanging contracts via solicitors or did they actually complete on the original private contrite?
No answers, I am afraid, just a demonstration of how the taxman may think.
Now, if you declare that you completed the sale of a property in 2006 at its 2002 value you are almost certainly going to attract the taxman’s interest. That is going to cost you time, effort and probably significant professional fees.
If you sold in 2002 there’s no Capital Gains liability having made the sale so close after moving out.
If you sold in Jan 2006, then, as fen girl said, the proceeds of sale will be deemed to be the market value in Jan 2006 but, you will be exempt for the period of occupation plus the last 3 years of ownership. You will have lettings relief up to £40,000 (not £45,000). The chances are that your entire Capital Gain will be free of tax.
If you care to publish accurate dates (month and year) of purchase and moving out with a reasonable estimate of the market value of the property in Jan 06, one of us will work it out.
I really don’t think you have anything to worry about in terms of tax liability but if you try to show now that you sold the property in 2002, then even if you are correct a formal enquiry from the taxman is a racing certainty and could well cost you a lot more.

Buggins

Hi Jimmo,
Thanks so much for your helpful reply - sorry not to be back earlier but holiday intervened!

I now have a bit more info and would much appreciate you, or anyone else, working out the possible liability for CGT. Details as follows:-

Exact dates and estimated value as follows:

• Property bought in August 1996 for £78,000
• Occupied by the owner until 1st May 2002
• Property valued by Estate Agent in April 2002 at £170,000
• Property sold on 12th January 2006. Estimated value £230,000

Do you need any further information?

Look forward to any input - thanks again
Buggins