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Archive for the ‘Capital gains tax’ Category
Wednesday, August 31st, 2011
Q My mother died 12 years ago, leaving her cottage to me and my brother. I inherited no money. The will stated that her second husband – my stepfather – could live in the house rent-free for as long as he lived, which was until quite recently. During that time I paid my share of maintenance costs for repairs, and my stepfather paid the bills.
I have now sold my half of the cottage to my brother. I have a valuation from the probate of £60,000 for the whole of the property (which seems very low), and I sold for £80,000. I am worried that my capital gains tax (CGT) liability may therefore be calculated on figures of £80,000 minus £30,000 minus my £10,600 allowance, ie my gain will be approximately £40,000. At a tax rate of 18% or 28% this seems to be an awful lot to have to pay on an asset that I had no choice about owning, no access to, and no opportunity to sell at any other time. Can you please advise what are the rules in this complicated situation? BP
A The fact your mother’s will stated that your stepfather had the right to live in the cottage until his death suggests that an interest-in-possession trust was set up. This would have given your stepfather the right to use the property in his lifetime, and you and your brother an absolute entitlement to the property on your stepfather’s death. Assuming that such a trust was created, the CGT position may be better than you think.
When your mother died the cottage became the trust’s asset, not yours. It became you and your brother’s asset only on the death of your stepfather, which would have brought the trust to an end. And there is usually no CGT to pay when beneficiaries (in this case you and your brother) acquire an asset on the death of the life tenant (your stepfather).
When calculating your own CGT bill your gain would be the amount your brother paid you for your share minus the market (not probate) value of your share at the date of your stepfather’s death (rather than your mother’s). As the market value of your share at the time of your stepfather’s death is likely to be nearer to what your brother paid you for it, your gain may well fall into the tax-free allowance of £10,600, or at least not exceed it by too much.
Posted in Capital gains tax, Features, guardian.co.uk, House News, Letters, Money, Property, Tax | Comments Closed
Wednesday, August 24th, 2011
Q I would be grateful for advice regarding my elderly aunt’s estate: I am her attorney and sole beneficiary in her will. She moved in with us several months ago and has expressed a wish to give her house to me now. I was wondering about the tax implications of this transfer of ownership, both for her and myself, and whether this would be different if the house is kept or sold. Also, is it possible to transfer ownership without incurring solicitor costs? DW
A To answer your last question first: yes, it is possible to transfer ownership of a property without paying a solicitor, by using the forms provided by the Land Registry. But there would still be a cost involved as you would have to pay Land Registry fees of between £50 and £920 depending on the value of the house.
As for tax implications, there would be no stamp duty land tax to pay as gifts of property do not attract this tax. However, there may be a potential inheritance tax bill if your aunt were to die within seven years of making the gift. This would also be the case if your aunt sold the house and gave you cash instead of giving you the physical property. But giving you cash could save you a tax bill, because if your aunt gave you the house and you subsequently sold it, you might have to pay capital gains tax if you sold it for more than it was worth when you were given it.
Posted in Capital gains tax, Features, guardian.co.uk, House News, Inheritance tax, Letters, Money, Property, Stamp duty, Tax | Comments Closed
Wednesday, August 17th, 2011
Q My mother is 64 and still working full time in London. She owns a property with no mortgage, which she bought in 2001. When she retires next year she wants to live on the Kent coast, and recently found somewhere she wants to buy. She wants to purchase this property and then move in upon retiring, when she will sell the London property to clear the additional mortgage on the Kent property and be left with a lump sum she can use to live on as she has very low pension provision.
Would this arrangement leave her vulnerable to paying capital gains tax (CGT) on her current home? Which would be the best mortgage for her? And what is the best way of minimising the tax she pays on this, as it would be illogical for her to pay huge capital gains when she is merely moving home, albeit with a year’s gap between move dates. JP
A Your mother shouldn’t face a CGT bill when selling the London home, provided she sells it within three years of moving out of it. Assuming the property in London has been her home, and she has lived in it for all the time she has owned it, she will qualify for what HM Revenue & Customs (HMRC) calls private residence relief, which makes the gains on the sale of a home tax free. There could, however, be a CGT bill if she has let the property at any time. More information is available in Help Sheet 283 on the HMRC website.
As far as getting a mortgage goes, your mother would be better off raising the money to buy the house in Kent by taking out a mortgage on her London home. If she took out a mortgage on the house in Kent she would need to have a cash deposit to put towards the purchase. By mortgaging the London home she should be able to raise the full amount she needs to buy the house in Kent, because I am assuming the London property is worth more than the house she wants to buy. If this is the case, the loan-to-value ratio will be quite low, which means your mother should have access to better mortgage deals.
Her age may deter some lenders, but if she makes it clear she plans to pay the mortgage off when she retires she should be able to get a mortgage. As she intends to pay it off rather quickly, she should steer clear of deals which make a charge for early repayment.
Posted in Capital gains tax, Features, guardian.co.uk, House News, Letters, Money, Mortgages, Property | Comments Closed
Wednesday, July 6th, 2011
Q We are selling our main home where we have lived for 14 years, and are moving into a flat we have owned for five years, which is currently worth less than we paid for it. This is as an interim measure until we buy another main home (hopefully in less than six months). We will then sell the flat, probably at a loss. Would we be liable for capital gains tax (CGT) on our old main home because we will have been resident for a period in the flat? DM
A Moving into the flat has absolutely no bearing on any potential CGT bill on your main home. When you sell your home, irrespective of where you subsequently move, there should be no CGT to pay because of what HM Revenue & Customs calls private residence relief. This makes any gains on a property you have lived in as your home (or main residence) tax free assuming you lived there for the entire time you owned it and the size of the garden is less than half a hectare (which is a little over an acre).
Because you have let the flat you are temporarily moving into, there could be a CGT bill when you sell that, but only if you make a gain. As you think you will make a loss there would be no tax to pay, but make sure you keep detailed records of the loss as you can use it to set against any capital gains made in future tax years.
Posted in Capital gains tax, Features, guardian.co.uk, House News, Letters, Money, Property, Tax | Comments Closed
Wednesday, June 22nd, 2011
Q My father died in November 2008 and my brother and I inherited his house. We have been very slow emptying and renovating it and I am only just getting round to filling in the AP1 and AS1 forms to re-register the property in our joint names. The Land Registry have told me there is no penalty for late notice of a change in the register, but they suggest I complete the forms as soon as possible to avoid the possibility of identity fraud.
My brother and I both own our own properties, neither of us want to live in my father’s house and I estimate it will take us at least another 6-12 months to make the property saleable. Are there any tax implications of completing the re-registration of the property sooner rather than later? My brother and I are both over 60, unmarried and have no dependents. BF
A The re-registration of your father’s property has no particular tax implications. When you and your brother eventually sell, when calculating the capital gains tax bill the date you acquired the property will be taken as the date of your father’s death, not the date you re-registered it. So you will need to know how much the house was worth at that date, which presumably you do since you should have had a valuation done when filling in the inheritance tax form for probate to be granted.
Posted in Capital gains tax, Features, guardian.co.uk, House News, Letters, Money, Property, Tax | Comments Closed
Wednesday, June 15th, 2011
Q My wife and I are purchasing a buy-to-let property. I am a higher rate taxpayer while my wife does not work, and thus has unused income tax allowances.
This property will be my wife’s project, so we thought of buying it in her name only with all income tax payable at her tax rate. However, we are conscious that that would mean we could only use one capital gains tax (CGT) allowance when we come to selling it. With that in mind it seems to make more sense to own the flat in both our names.
Is there a tax-efficient way we could achieve both goals, paying at a lower tax rate and using both CGT allowances when the time comes to sell? I wonder if my wife could gift me half of it at a later date, thus allowing us to use both CGT allowances when we sell it? SJ
A Yes it is possible – and within the tax rules – for your wife to own the buy-to-let property in her name solely, but give you half at a later date so you can benefit from two lots of capital gains tax allowances, which would be £10,600 a person in the 2011-12 tax year. And unlike gifts to non-spouses, gifts to a husband, wife or civil partner don’t attract CGT even though a gift counts as a disposal for the purpose of this tax.
What is slightly different, however, is that when you come to work out your gain on the sale of the property, it is assumed you acquired your gifted share on the date your wife acquired the property rather than the date the gift was actually made.
One other thing you need to bear in mind is that, if there is a mortgage on the property there may be a stamp duty land tax (SDLT) bill. If the amount outstanding on the mortgage at the time of a gift of property is more than the SDLT threshold of £125,000 there will be an SDLT bill. However, if you take over half the mortgage, SDLT is charged only on the amount of mortgage you take over. If there is no mortgage, however, you don’t have to worry about SDLT.
Posted in Capital gains tax, Family finances, Features, guardian.co.uk, House News, Income tax, Letters, Money, Property, Stamp duty, Tax | Comments Closed
Wednesday, May 4th, 2011
Q My parents are in their 70s and own a second property, which they let out. They want to sell but fear the capital gains tax (CGT) which would be levied. They bought the house for £53,000 in 1987 and it is on the market for £210,000. They each own 50%.
On selling they have been advised of a CGT bill of between £15,000-£25,000 each after both their annual CGT limits of £10,600 have been applied. They understand that the CGT would be levied at 28% as the capital gained, after tax, will take them above the higher tax limit (ie the capital gain is effectively counted as income for that tax year).
However, it is unclear if this higher tax limit is for a single person or a couple. Would just over £80,000 of the gain be taxed at 18% and the excess above this and including all other annual income charged at 28%? If the house is put in four names – my parents, my sister and I – would this mean the CGT bill is reduced because there would be four CGT allowances?
I understand there are also implications for inheritance tax and the seven year rule. I also believe that if this transfer were enacted but the house did not sell then the revenue from the let would be split four ways, with each party paying income tax. I am not clear, though, on whether the transfer of ownership would involve stamp duty. Please help! JS
A Assuming your parents sell the property for £210,000, the most each will have to pay in CGT is just over £19,000. This is worked out by taking the sale price of £210,000, subtracting the purchase price of £53,000 and dividing by two to give a gain of £78,500 that each of your parents might make. From the £78,500 you then subtract the tax-free CGT allowance of £10,600 (in the 2011-12 tax year) to produce a taxable gain of £67,900. Assuming the higher CGT rate of 28% the tax bill would be £19,012 each.
But that assumes all of the gain is taxed at 28%, which it not might be. The capital gain is not taxed as income, but you are right in thinking that any capital gain is added to income to determine what rate of CGT is payable. If taxable income (gross income minus personal tax allowance) plus capital gain comes to less than £35,000, all of the gain is taxed at 18%. If taxable income plus gain comes to more than £35,000 (as in your parents’ case), the portion of the gain that takes you over the £35,000 is taxed at 28% while the portion of the gain up to £35,000 is taxed at 18%. As your parents are taxed separately their actual tax bills will depend on their income, so could be very different.
Transferring half the property to you and your sister would not mean you benefit from four times the annual tax-free allowance of £10,600. Giving away half the property counts as a disposal for CGT purposes and it’s the person (or people) doing the disposing who are liable for the tax and also entitled to claim the tax-free allowance.
But the tax-free allowance is not given per gain, it is given against total gains in a tax year. So if, in the same tax year, your parents gave away half the property and then sold the other half – each making a gain of £39,250 at each disposal – the taxable gain after the annual allowance would be the same as if they had simply sold the property.
If your parents did give you and your sister half the property you are right that inheritance tax could be payable if your parents died within seven years of the gift being made, but not if they survive for seven years. You are also right in thinking that if the house continued to be let you would have to divide the rental income between you and pay tax on it.
Any transfer of property is potentially liable to stamp duty land tax if it is over the £125,000 threshold, so not in your case, although you would have to pay a fee to the Land Registry on transfer of ownership.
Posted in Capital gains tax, Features, guardian.co.uk, House News, Inheritance tax, Letters, Money, Property, Stamp duty, Tax | Comments Closed
Wednesday, April 13th, 2011
Q I have just sold a second house for £85,000. For the past 17 years I have rented it to private tenants, but sold it because it needs a lot of money spending on it, was quite far away from where I now live, and I want to help my son get on the property ladder.
My intention is to buy a house outright for £80,000 and let him buy it off me for £500 a month rent for the next 160 months. He does not have to pay me any interest. I will be paid this monthly for the next 13 years or so, which will take me into retirement when my pensions kick in.
I know I could put the money in some kind of a savings account and withdraw the capital plus some interest over the years, but I want to help my son and his girlfriend get a house.
Am I correct in saying that the £500 a month rental purchase from him would not be classed as income? This second house I sold was initially inherited by me at a value of £65,000. Any capital gains tax (CGT) I may have to pay should be a small amount. However, since I am reinvesting the money in another house for my son to eventually buy from me, will I be exempt from CGT? MB
A To answer your last question first, no you won’t be exempt from CGT on selling the house you inherited. The fact you intend to invest the proceeds in another house for your son is irrelevant. However, had you been reinvesting the money in another property to let, you might have been able to put off a CGT bill by claiming what is called roll-over relief. But as it stands, the amount of the gain on which you have to pay tax will be the sale proceeds less its value when you inherited it, less selling costs (such as estate agent and legal fees), less your annual tax-free CGT allowance of £10,600 (in the 2011-12 tax year).
As far as tax on the £500 a month goes, it could be classed as income by HM Revenue & Customs because, until you actually hand over the house to your son, it looks suspiciously like rent.
This would not be the case if you lent your son £80,000 to buy a house in his name, because the £500 a month would clearly be loan repayments. There would also be no CGT implications in lending your son money.
However, if you do what you propose you could trigger a CGT bill at the point at which you transfer ownership of the house to your son if it has gone up in value in the period you owned it.
Posted in Capital gains tax, Features, guardian.co.uk, House News, Letters, Money, Property, Renting property, Tax | Comments Closed
Wednesday, April 6th, 2011
Q Eleven years ago my partner moved into my house, on which I’d had a mortgage since 1984. We have both lived there ever since. We have always shared the mortgage payments, improvement costs and utility bills, and have since paid off the whole mortgage, but the property has always been in my name and I hold the freehold on my own.
We entered into a civil partnership four years ago and I would like us to co-own our house, which is valued at about £600,000. How can we do this, and would we/he have to pay capital gains tax, stamp duty or anything else? My partner is also wondering about buying a flat to rent out on the strength of his co-ownership. Could he use the house to raise a mortgage for such as venture? CH
A In order to make your partner a joint owner you will need to add his name at the Land Registry, for which there is a fee of £280 (assuming you transfer half the house to him). You won’t, however, have to pay capital gains tax, as gifts between civil partners (and spouses) are tax free. In addition, there won’t be a bill for stamp duty land tax because no money changes hands when you transfer part ownership of the house. Had you still had a mortgage stamp duty would have been charged on the amount of the mortgage your partner would have taken over, but as it is paid off you don’t need to worry.
As far as raising a mortgage goes, yes your partner could borrow against your home once you become joint owners, but you would both need to be named on the mortgage. The alternative would be for your partner to take out a buy-to-let mortgage secured on the flat to be let out, which could be solely in his name.
Posted in Buying to let, Capital gains tax, Features, guardian.co.uk, House News, Letters, Money, Property, Stamp duty | Comments Closed
Wednesday, March 23rd, 2011
Q After two years of trying to sell in a falling market, in December 2008 my wife and I finally managed to move house by releasing the equity in our home by remortgaging with a buy-to-let. Our plan was to rent it out for a two-year fixed period and then sell when the market was more buoyant.
If we now sell the rented property will we be liable to pay tax on the full price (approximately £200,000) or on the increase from when we bought it?
We raised £70,000 from the remortgage and have had an interest-only mortgage on a fixed rate for two years. The rental income just covers the mortgage and insurance.
It would seem unfair to pay tax on the whole amount as we had lived in the same house for 15 years. Is there a way of avoiding tax on the full amount? PH
A The fact you have a mortgage on the property has no bearing on the eventual capital gains tax bill. But the good news is that if you manage to sell the property by December 2011 – that is, within three years of moving out – you will still qualify for what is known as private residence relief, which makes any gain tax free.
But even if you don’t manage to sell by then you won’t be taxed on the whole gain, because the time you lived in the house is taken into account when working out what proportion of any gain is taxable. If you eventually need to do the sum, you’ll find more information in HMRC’s Help Sheet 283.
Posted in Capital gains tax, Features, guardian.co.uk, House News, Letters, Money, Property, Tax | Comments Closed
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