Capital Tax Liability: Single vs. Joint

theboyedwards

My wife currently owns a flat in London that we have rented out for the past 2 ½ years and I wondering whether anyone out there could offer me some tax advice.

We have made the decision to continue renting the property out for the long term but are aware that the property will be liable for Capital Gains tax from the 3rd year. My question is, should we continue to hold the property in her name only or should we transfer the property deeds into joint names at a cost of c. £500. The cost is quite severe but I’m happy to pay if it means that we significantly reduce our future tax liability.

Any thoughts would be greatly appreciated.

Kind regards,
TheBoyEdwards

Pennywise

You don't say, but I presume that she lived in it before renting it out, which I presume is where you get your "3 years" from. The calculations will be more complicated than that and will proportion the total profit made over the entire period of ownership, between the "principle private residence" time (actually lived in) with the time it was let. Then you have the 3 year exemption and also lettings relief. The CGT on eventual sale may not be as bad as you fear - the profit would certainly not suddenly become fully taxable as year 3 passes!

As to whether to put the property into joint names will depend on far more than the cost you quote.

Rental profits will be taxed jointly between you for income tax - not a problem if you are both paying the same rate of tax, but if you are higher rate, the annual income tax would be more.

Similarly with the eventual capital gain. You would effectively double-up the annual CGT allowance, but the taxable gain is taxed at your own highest tax rate. You may find that some of the profit is taxed at 40% on you instead of 22% on your wife, so costing you more in tax.

I think I would suggest you leave things as they stand and consider putting into joint ownership at a later date, when you get nearer to selling it. As a general rule of thumb, I've found it acceptable by the Inland Revenue to put a property into joint ownership in one tax year and then sell it the next - if you leave it to the last minute and sell it the month after you've put into joint ownership, the IR take a dimmer view and regard it as deliberate tax evasion (although still not too much they can do if it is done legally).

NeilW

Gifts between husband and wife have a statutory basis in tax law. You can gift the property five minutes before you sell it and there is damn all the Revenue can do about it.

If the property has at any time been lived in as the Private Residence of the owner then you obtain CGT relief. This will be the time you lived in it *and* the last three years in any event (ie you can have left the place empty for three years and you still get full relief).

If you let the place then you also get letting relief, which is the lower of £40,000, the gain attributable to the Private Residence Relief, and the gain attributable to the period of letting.

Chances are that it will be a fair while before CGT even becomes an issue - particularly as you have to have a bill of £8200 before you pay anything.

NeilW

theboyedwards

Thanks for your replies - very much appreciated.

I think that we'll keep the property in my wifes name for the time being.

Thanks again.