capital gain tax

[CSLmarson]

hi there

can someone with a bigger brain explain in simple terms capital gain tax ???

im looking to move out of my flat and rent with the misses, im going to rent my flat but want to know the loop holes / catches as my flat has gone up in value a lot in the last few years and i will be looking to sell in the next year or so.

cheers

[JBM78]

The last 3 years of ownership are exempt so you won't be paying any CGT if you sell within 3 years of moving out.

[Sir Bagalot]

JBM78 said:

The last 3 years of ownership are exempt so you won't be paying any CGT if you sell within 3 years of moving out.

As of April this year this changed to 18 months.

CGT is explained here

In a nutshell if you rent now and sell in 18 months you will have no CGT liability. If you sell beyond this you will but also take into account you have a CGT allowance of £11K and a host of other allowances

[CSLmarson]

Thanks for the answers chaps

So if I rent my flat out as long as it's sold and a done deal within 18 months I don't get taxed on the profit yea ???

[CSLmarson]

And sorry what do you mean by 11k allowance ??

[Eric Mc]

Capital Gains Tax (CGT) is charged on the difference between what you bought an asset for and what you get when you dispose of it. If the difference is a gain (not always the case) the gain will be potentially subject to CGT.

Regarding land and property, if the property is your main residence, the gain on disposal is completely exempt from CGT.

If the property was NEVER your main residence, ALL of the gain will be subject to CGT (less any reliefs and allowances available).

If the property was your main residence for SOME of the time you owned it, the gain is split on a time basis between the gain that happened whilst it was your main residence and the gain that happened in the period when it was NOT your main residence. So, if you owned a property for ten years and it had been your main residence for six of those years, 6/10 of the gain will NOT be taxed.
You also get an additional 18 months "free gratis" so the exempt period in the example above would actually be 7.5/10.

In working out the "Cost" of an asset, the figure is made up of -

the agreed purchase price of the property

legal and ancillary costs incurred at the time of purchase (Stamp Duty, legal fees, agent's fees, search fees etc)

subsequent "enhancement costs" - such as major redevelopment work (extensions, new kitchens, double glazing, conservatories etc)

Every individual gets an annual CGT allowance of (currently) £11,000. So before any CGT is charged in any given tax year, £11,000 is deducted from the gain.

If a property is jointly owned, the gain is split 50:50 between each owner and each owner will also receive their £11,000 allowance. So, by transferring 50% ownership to a spouse (which will not subject to Inheritance Tax (IHT) as transfers between spouses are exempt from IHT), substantial CGT savings can be made - as long as the transfer is done properly and legally.

Let properties which were once your main residence and which have been let commercially are also eligible for Commercial Lettings Relief which can be as high as £40,000.

CGT is charged at 18% up to the Higher Rate tax threshold after which anything falling above the threshold is taxed at 28%. Again, splitting ownership between spouses can make better use of tax bands and thresholds.

[gibbon]

Eric Mc said:

Let properties which were once your main residence and which have been let commercially are also eligible for Commercial Lettings Relief which can be as high as £40,000.

Great explanation Eric. Can I just clarify that its my understanding that theres residential letting relief worth up to 40k, not just commercial lettings relief?

[The jiffle king]

There used to be another exception (I am going back 2 years)

- If you are sent away with work to another location where it is not reasonable to live in your main residence, then you were exempt from CGT as long as you returned to live in the house before selling it. (I cannot recall what factsheet it was, but I posted it on PH a couple of years ago)

Interesting that the time has been brought down from 3 years to 18 months

[Eric Mc]

gibbon said:

Eric Mc said:

Let properties which were once your main residence and which have been let commercially are also eligible for Commercial Lettings Relief which can be as high as £40,000.

Great explanation Eric. Can I just clarify that its my understanding that theres residential letting relief worth up to 40k, not just commercial lettings relief?

Yes - I meant "residential".

[Eric Mc]

The jiffle king said:

There used to be another exception (I am going back 2 years)

- If you are sent away with work to another location where it is not reasonable to live in your main residence, then you were exempt from CGT as long as you returned to live in the house before selling it. (I cannot recall what factsheet it was, but I posted it on PH a couple of years ago)

Interesting that the time has been brought down from 3 years to 18 months

You do not HAVE to be living in a property to enable it to be deemed to be your main residence.

Conversely, even if you are living in a property it may not qualify as your main residence.

The rules are quite flexible in that they try to account for the quite complicated and messy circumstances that people can have regarding where they are actually living and what actually constitutes being "resident" in a property.

[sumo69]

gibbon said:

Great explanation Eric. Can I just clarify that its my understanding that theres residential letting relief worth up to 40k, not just commercial lettings relief?

The lettings relief is the lowest of the following:

1) £40k
2) Gain attributable to the letting period
3) Amount of PPR due

As Eric states, if the property is jointly held on the date contracts are exchanged, then the above will be due to each party.

David

[Burrow01]

sumo69 said:

gibbon said:

Great explanation Eric. Can I just clarify that its my understanding that theres residential letting relief worth up to 40k, not just commercial lettings relief?

The lettings relief is the lowest of the following:

1) £40k
2) Gain attributable to the letting period
3) Amount of PPR due

As Eric states, if the property is jointly held on the date contracts are exchanged, then the above will be due to each party.

David

Thanks for that - this is helping a lot

Can you clarify 3) Amount of PPR due - does this mean the CG due? or the actual amount of private rental relief granted for the non letting period?

[CSLmarson]

Just one more question gents
If I move out for a year and rent my flat out and move back in after 12 months but before 18 months
How does this affect the taxation. ??
Thanks

[barchetta_boy]

When HMRC refer to "taxable income" for the purposes of determining whether you pay 18% or 28%, does the gain itself count as taxable income?

Or is it just PAYE salary/bonus and dividends?

Joel

[Eric Mc]

barchetta_boy said:

When HMRC refer to "taxable income" for the purposes of determining whether you pay 18% or 28%, does the gain itself count as taxable income?

Or is it just PAYE salary/bonus and dividends?

Joel

Yes, taxable income is ALL income from all sources - including the taxable gain. In many cases, it is the gain itself that puts you into the 28% CGT bracket.

[barchetta_boy]

Bugger.