Tax question for accountant types??
Discussion
Got a question for an accountant type person. My sister bought a flat in 1975 for £30k she moved into it and it was her only property. In 1985 she bought a house for £130k, moved into it and rented out the flat. At that point the flat was worth £70k. Today the flat is worth £230k and the house she still lives in is worth £350k. Today she is selling both to buy another house, she owns both outright, no mortgages/loans.
The question – how does the tax work? I assume the house is exempt because it has been her primary home since she has owned it and as far as I know the government has not found a way of taxing that(yet). My thinking would be that the flat is now classed as a second home that she will have made a profit on and she will owe CGT on it on anything over the current allowance(£8500?). If that is correct, what figures would Taxman and Robbing use to take what they want?
Can someone please tell me how much of the above is right/wrong and how this all works – TIA.
The question – how does the tax work? I assume the house is exempt because it has been her primary home since she has owned it and as far as I know the government has not found a way of taxing that(yet). My thinking would be that the flat is now classed as a second home that she will have made a profit on and she will owe CGT on it on anything over the current allowance(£8500?). If that is correct, what figures would Taxman and Robbing use to take what they want?
Can someone please tell me how much of the above is right/wrong and how this all works – TIA.
Sounds like you've got in pretty much Ribol. I think that Mr Taxman will take 40% of the sale proceeds as capital gains tax on the sale price that you sister actually achieves when she sells the flat.
Gains on her primary reisdence ( house ) are cap gains tax free.
Jaglover might be able to confirm this as he's a 'proper' accountant.....
>> Edited by timmy30 on Thursday 2nd February 09:32
Gains on her primary reisdence ( house ) are cap gains tax free.
Jaglover might be able to confirm this as he's a 'proper' accountant.....
>> Edited by timmy30 on Thursday 2nd February 09:32
Ribol said:
If that is correct, what figures would Taxman and Robbing use to take what they want?
Can someone please tell me how much of the above is right/wrong and how this all works – TIA.
I don't deal with capital gains tax at work (we have a tax department for that) but my understanding is that if a property has been occupied as a principal private residence for only part of the period of ownership then only a part of the gain on diposal will be exempt from CGT.
It is quite a mindboglling area and I am not an accountant but do have a couple of investment flats so have looked at it a bit - my understanding is she will only be charged CGT on the profit from the date she moved out upto the date of sale, so an estimated price of the flat as at 1985 values will need to be agreed with the taxman. However you can also sell within 3 years of moving out and pay no CGT at all, this is where my knowledge gets a bit murky, as if she did not sell within the three years then my guess is that the CGT valuation goes back to 1985 but it could in theory still be 1985 + the 3 years allowance so valuation would then need to be at 1988 prices instead - as I say this is where I start to falter and is where I hand it over to an accountant and ask them just to tell me how much to write the cheque for.
There may also be a CGT taper relief entitlement as it is over 10 years and also if the property is in her name only but she is married then remember she can gift half the flat to her husband prior to sale (tax free gifts between spouses) and therefore double the £8.5k CGT allowance to £17K.
Primary residence definitely not liable .... thank the Lord.
>> Edited by touchingcloth on Thursday 2nd February 10:05
There may also be a CGT taper relief entitlement as it is over 10 years and also if the property is in her name only but she is married then remember she can gift half the flat to her husband prior to sale (tax free gifts between spouses) and therefore double the £8.5k CGT allowance to £17K.
Primary residence definitely not liable .... thank the Lord.
>> Edited by touchingcloth on Thursday 2nd February 10:05
Ribol said:
However you can also sell within 3 years of moving out and pay no CGT at all
Isn't there some rule that kicks in if it is rented out, as in, if it it left empty the 3 years rule applies but if you rent it out it doesn't?
Don't think so, got me interested now and found this:
www.taxationweb.co.uk/articles/article.php?id=92
important bit said:
Private Residence Relief
However, property investors, more commonly use, the partial residence relief. This relief can be claimed if you used the property as your main residence, but then also moved out of the property whilst still retaining ownership i.e. the property was rented out.
In such a scenario, no capital gains tax will be liable for the duration that the property was the main residence and for the last three years of ownership. The latter is covered by the '36 Month Rule'.
A growing number of property investors are using the '36 Month Rule' to their advantage. When a new property is purchased, they are renting out the existing property and moving into the new one, thus allowing for another three years of tax free capital growth.
From this it also looks like she can claim an the additonal 3 years as well as her time there so that is a brucie bonus.
The flat was originally her Principal Private Residence (PPR) - so that entire initial period when she lived there is exempted from Capital Gains Tax. A time apportionment exercise is carried out to apportion the element of the gain occuring when it was her PPR.
She bought the flat in 1975. When the CGT computations are carried out, she can opt to use the original 1975 purchase cost of the property as the base cost or she can opt for a 31 March 1982 valuation (whichever works out the most beneficial for her). Also, whichever base cost she chooses, she will apply Indexation from that date up to 5 April 1998. From 6 April 1998 onwards, she will aply Taper Relief (which is cruder but does the same job). Indexation and Taper Relief are applied to reduce the effects of price inflation on the gain.
If she carried out any Capital Expenditure on the property over its life or any other expenditure which was not offset against the rental income, she can add this to the base cost of the property to increase it for the CGT calculation (thereby reducing any gains arising). Obviously, if she is using the 31 March 1982 valuation option, she can only add on any such "Enhancement Expenditure" incurred after 31 Matrch 1982. The problem here might be having original documentation to hand to prove such enhancement expenditure.
Indexation and Taper Relief calculations should also be applied to this Enhancement Expenditure from the dates that expenditure was incurred.
She may also be elligible for Commercial Letting Relief.
And. as already mentioned, because it was once used as her PPR, the final three years of ownership are excluded from CGT - whether she was living there at the time of sale or not.
Finally, she will have her CGT Annual Personal Allowance which currently stands at £8,500. It wil, probably increase slightly after 5 April 2006 (it usually does - you should find out by mid March whether it will).
Simple, isn't it.
My hunch is that she may have little or no liability to CGT by the time all these reliefs are applied.
>> Edited by Eric Mc on Thursday 2nd February 10:53
She bought the flat in 1975. When the CGT computations are carried out, she can opt to use the original 1975 purchase cost of the property as the base cost or she can opt for a 31 March 1982 valuation (whichever works out the most beneficial for her). Also, whichever base cost she chooses, she will apply Indexation from that date up to 5 April 1998. From 6 April 1998 onwards, she will aply Taper Relief (which is cruder but does the same job). Indexation and Taper Relief are applied to reduce the effects of price inflation on the gain.
If she carried out any Capital Expenditure on the property over its life or any other expenditure which was not offset against the rental income, she can add this to the base cost of the property to increase it for the CGT calculation (thereby reducing any gains arising). Obviously, if she is using the 31 March 1982 valuation option, she can only add on any such "Enhancement Expenditure" incurred after 31 Matrch 1982. The problem here might be having original documentation to hand to prove such enhancement expenditure.
Indexation and Taper Relief calculations should also be applied to this Enhancement Expenditure from the dates that expenditure was incurred.
She may also be elligible for Commercial Letting Relief.
And. as already mentioned, because it was once used as her PPR, the final three years of ownership are excluded from CGT - whether she was living there at the time of sale or not.
Finally, she will have her CGT Annual Personal Allowance which currently stands at £8,500. It wil, probably increase slightly after 5 April 2006 (it usually does - you should find out by mid March whether it will).
Simple, isn't it.
My hunch is that she may have little or no liability to CGT by the time all these reliefs are applied.
>> Edited by Eric Mc on Thursday 2nd February 10:53
Eric Mc said:
She may also be elligible for Commercial Letting Relief.
Is this the same as Taper Relief Eric? I understood it would be classed as a Non-Business Asset as it was individually owned as opposed to being owned under a Ltd Company, and would only be eligible for "Non Business Asset Taper Relief" at 5% per year after 3 years upto max 40% after 10 years starting from 1998.
to you and all. 
Ribol said:
Got a question for an accountant type person. My sister bought a flat in 1975 for £30k she moved into it and it was her only property. In 1985 she bought a house for £130k, moved into it and rented out the flat. At that point the flat was worth £70k. Today the flat is worth £230k and the house she still lives in is worth £350k. Today she is selling both to buy another house, she owns both outright, no mortgages/loans.
The question – how does the tax work? I assume the house is exempt because it has been her primary home since she has owned it and as far as I know the government has not found a way of taxing that(yet). My thinking would be that the flat is now classed as a second home that she will have made a profit on and she will owe CGT on it on anything over the current allowance(£8500?). If that is correct, what figures would Taxman and Robbing use to take what they want?
Can someone please tell me how much of the above is right/wrong and how this all works – TIA.
There is a really good leaflet that the Inland Revenue publish on just *this* issue - explains all the ins and outs , reliefs etc. with examples , in simple terms for a layman ...... you can pick one up from your local tax office.... (which I did for myself recently )
Commercial Letting Relief is unrelated to Business Asset Taper Relief.
As an aside (and not relevant to this query), Ltd companies still apply the old fashioned Indexation Relief and not Taper Relief to their asset disposals. Why Mr Brown decided that Taper Relief was not appropriate for Ltd companies has never been explained.
One of the major problems with CGT is the fact that every time new rules are introduced, the old rules are never completely superseded. So, if you have an asset for many years, you might have to be aware of CGT rules dating right back to 1965 (the year the tax was first introduced).
>> Edited by Eric Mc on Thursday 2nd February 11:29
As an aside (and not relevant to this query), Ltd companies still apply the old fashioned Indexation Relief and not Taper Relief to their asset disposals. Why Mr Brown decided that Taper Relief was not appropriate for Ltd companies has never been explained.
One of the major problems with CGT is the fact that every time new rules are introduced, the old rules are never completely superseded. So, if you have an asset for many years, you might have to be aware of CGT rules dating right back to 1965 (the year the tax was first introduced).
>> Edited by Eric Mc on Thursday 2nd February 11:29
A little beware - that I don't think applies here - I have seen HMRC deny PPR relief on the basis of the fact the property was purhcased with the intention of selling on to make a profit - I understand that the taxpayer was repeatedly buying - living in for a short period of time and selling within 3 years.
Coco H said:
A little beware - that I don't think applies here - I have seen HMRC deny PPR relief on the basis of the fact the property was purhcased with the intention of selling on to make a profit - I understand that the taxpayer was repeatedly buying - living in for a short period of time and selling within 3 years.
Forgetting the situation my sister finds herself in for a minute it sounds like it would have been a very clever one off move a few years back when prices were rising at a silly rate. Not too sure you would gain much from doing it today.
Buying and doing up your "PPR" and then selling on tax free is a common ploy during times of high house price inflation. HMRC will keep a wary eye on this behaviour if it gets a bit too "serial".
They are not that concerned about the CGT area but more the fact that the individual might be actually engaged in a bona fide property development business - which is a straightforward Income Tax matter (not CGT).
They are not that concerned about the CGT area but more the fact that the individual might be actually engaged in a bona fide property development business - which is a straightforward Income Tax matter (not CGT).
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