CGT - Am i exempt if i sell within 3 yrs

adlad_2

Dera All

Some advice please....

My wife owns a property (bought £145K in 07/01) which she lived in when we met and we moved into together. Since marrying we bought a house (in my name ) and moved in (11/02).

Her flat is now worth c £250k. We are looking to remortage (requst in mortgage section), but a friend said that we had up to 3 yrs after the flat was our main residence when we could sell it and not pay CGT (eg until 11/05). Is this correct? :-/


If so, should we sell and reinvest so as to advoid CGT on the flat?

This may of course influence our decision to re-mortgage!

Thanks

adlad

MarkyMarkD

Your friend is right... but it's not an "on/off" thing. If you sell it 4 years after you move out as main residence, you will pay tax on 1 year. The whole gain over the time she owned it will be divided by the number of years and the relevant proportion subjected to CGT, after knocking off her personal CGT allowance of course.

If you were going to incur a taxable gain this way, it might be worth transferring from her name into joint names immediately prior to sale - you'd have to weigh up the solicitors' costs against the saving in tax. Transfers between husband and wife are effectively at cost for CGT purposes.

MJSW

I'd be extremely careful about transferring the property into joint names in this scenario. Whilst the property has at some time been adlad's main residence, it has never been so at the same time as he owned it. In order to qualify for relief, the property generally has to be owned AND lived in at the same time. Periods when the property was lived in but there ws no legal or equitable interest in it do not count towards the exemption. The period of occupation between up to 11/02 is only likely to have been 'occupation under licence' as far as adlad is concerned, rather than any sort of legal interest in the property.

There is a relief for transfers between husband and wife whereby periods of ownership and occupation by one spouse can be treated as periods of ownership and occupation by the other. However, the property in question must still be the main residence at the date of the transfer, which in this case it isn't.

Get this wrong, and you could risk losing half of the private residence exemption altogether, a very expensive mistake indeed! Make sure you get professional advice first.

Another thing which may be relevent is that if the flat is now being let or has previously been let, your wife should be eligible for lettings relief. The provides additional relief equal to the lower of a) the amount of private residence relief due, b) the gain due to letting (which would be the gain remaining after relief in this case), or c) £40,000. With the size of gain here, that could add approximately another couple of years to the period when the property could be sold without triggering a gain.

If so, should we sell and reinvest so as to advoid CGT on the flat?

It's impossible to really answer that, as it depends on what happens to property prices in the future. Unless you live in the new property, any increases in its value would be fully chargeable to Capital Gains Tax (subject to the usual reliefs such as taper relief and the annual exemption etc). But if you keep the original one, then only a proportion of the future increases would be chargeable, as the total gain is reduced for the proportion of time it was the main residence (or deemed residence for the final 3 years). On the other hand, the longer you keep the current flat, the proportion of the gain already made (£105,000) which remains exempt will get lower and lower. So it's really a case of weighing up the risk of losing relief for the past gains the longer you keep the property against the possiblility of getting some relief for future gains.