Buy to Let CGT issue
Discussion
Hi - can anyone help - I have a number of buy-to-let properties. I purchased one of them on the 19th March 2004. I rented it out immediately to my father who is still there. The property has risen in price by approx. £60k. My intention is to sell the property within the next 18 months and re-invest the equity (circa £80k) in a holiday let. I gather that if I sell the property as is, I incur Capital Gains Tax to 40%. My position is that I am in the process of finalising the sale of my residential home (main residence) within the next 2 weeks. If I nominate the flat that I currently rent to my father as my main residence, will I effectively escape the CGT liability?
I'd appreciate any advice?
I'd appreciate any advice?
Youy would have to demonstrate that you had lived there for a reasonable time e.g. minimum six months, otherwise IR will know you are simply evading tax. Also you will still be liable for CGT on the years between purchase and taking up residence.
Will speak to a couple of collegaues and see what they think.
Will speak to a couple of collegaues and see what they think.
As Rich25 says, you're on a sticky wicket messing with nominating a non-residence as your main residence. Tax evasion is looked upon very dimly by HMRC and you could face a hefty fine (as well as still being liable for the tax).
Note (1) that the CGT will only apply to the equity, not the full sale price.
(2) Anything you have spent on the property in the meantime is probably deductible from the total. This may even include mortgage payments but I'm not sure on that one.
(3) You have an annual capital gains allowance that you can use to offset against part of the gain. Not sure if you can roll up any previous years' unused allowance but would suspect not.
The total liability might not be as bad as you think.
In the worst possible case, 60% of something is better than 100% of nothing...
>> Edited by pdV6 on Thursday 9th March 13:38
Note (1) that the CGT will only apply to the equity, not the full sale price.
(2) Anything you have spent on the property in the meantime is probably deductible from the total. This may even include mortgage payments but I'm not sure on that one.
(3) You have an annual capital gains allowance that you can use to offset against part of the gain. Not sure if you can roll up any previous years' unused allowance but would suspect not.
The total liability might not be as bad as you think.
In the worst possible case, 60% of something is better than 100% of nothing...
>> Edited by pdV6 on Thursday 9th March 13:38
The CAPITAL element of mortgage REPAYMENTS are totally unclaimable against tax. After all, they only equate to giving back the amount you originally borrowed.
However, the INTEREST element can be offset. Most people will claim the interest against their rental income in order to reduce their annual Self Assessment Income Tax bill. That means it cannot be claimed against any eventual Capital Gain.
The same goes for repaid costs. Most people will try and claim repairs and maintenance costs as a deduction against their Rental Income. However, larger items of expenditure may not be claimable against the rent. Instead, these larger costs are added to the original cost of the property for future offset against any eventual Capital Gain.
Finally, as the property was rented, if the rent was at a normal commercial rate, further allowances in the form of Commercial Lettings Allowance may be claimable.
However, the INTEREST element can be offset. Most people will claim the interest against their rental income in order to reduce their annual Self Assessment Income Tax bill. That means it cannot be claimed against any eventual Capital Gain.
The same goes for repaid costs. Most people will try and claim repairs and maintenance costs as a deduction against their Rental Income. However, larger items of expenditure may not be claimable against the rent. Instead, these larger costs are added to the original cost of the property for future offset against any eventual Capital Gain.
Finally, as the property was rented, if the rent was at a normal commercial rate, further allowances in the form of Commercial Lettings Allowance may be claimable.
Eric is right (as ever). You should already be offsetting the interest of the mortgage and any repairs against tax, so you'll already have had the benefit of that.
Don't forget that you only pay CGT on the difference between the market value of the property when you acquired it and the market value when you dispose of it, less any Taper Relief allowable.
>> Edited by JonRB on Thursday 9th March 20:00
Don't forget that you only pay CGT on the difference between the market value of the property when you acquired it and the market value when you dispose of it, less any Taper Relief allowable.
>> Edited by JonRB on Thursday 9th March 20:00
JohnCL said:As far as I am aware, CGT is calculated on the difference between market value at time of acquisition and market value at time of disposal.
Does anyone know on what value any gain will be based, the discounted actual purchase price or the '98 market value.
Edit: See www.hmrc.gov.uk/leaflets/cgtfs1.htm for more information.
>> Edited by JonRB on Monday 13th March 09:53
If you're reinvesting the profit on the sale in another venture, then you should be able to take advantage of the rollover relief.
This won't negate your tax liability, rather it will postpone it.
Have a word with your accountant. If you haven't got one, get one ... or go have a chat with your solicitor.
This won't negate your tax liability, rather it will postpone it.
Have a word with your accountant. If you haven't got one, get one ... or go have a chat with your solicitor.
"Have a word with your accountant. If you haven't got one, get one ... or go have a chat with your solicitor."
Thanks Guys,
The solicitor reckoned it was on the purchase price and the accountant wasn't sure - not really a result. Also, I wonder when we actually 'acquire' it, on his death when it finally passes into our names from G'dad's trust or when we paid over the cash in '98.
We are holding on to it for the foreseable future for the income from the rent, so this is just a general enquiry to know what to expect. Best case would be on market value from date of his death as this is recent and gains have slowed down from the high rises since '98.
John
Thanks Guys,
The solicitor reckoned it was on the purchase price and the accountant wasn't sure - not really a result. Also, I wonder when we actually 'acquire' it, on his death when it finally passes into our names from G'dad's trust or when we paid over the cash in '98.
We are holding on to it for the foreseable future for the income from the rent, so this is just a general enquiry to know what to expect. Best case would be on market value from date of his death as this is recent and gains have slowed down from the high rises since '98.
John
JohnCL said:
"Have a word with your accountant. If you haven't got one, get one ... or go have a chat with your solicitor."
Thanks Guys,
The solicitor reckoned it was on the purchase price and the accountant wasn't sure - not really a result. Also, I wonder when we actually 'acquire' it, on his death when it finally passes into our names from G'dad's trust or when we paid over the cash in '98.
We are holding on to it for the foreseable future for the income from the rent, so this is just a general enquiry to know what to expect. Best case would be on market value from date of his death as this is recent and gains have slowed down from the high rises since '98.
John
Hang on. You spoke to both your solicitor and accountant about this and NEITHER one even mentioned rollover relief?
<expletive deleted>
www.eudoxus.com/mpac9604.html#
Have a read through, then give your tax office a call. Ask your solicitor and accountant why they hadn't suggested the relief, then consider using someone else. You're looking at avoiding a £15,000 bill .... they should be on top of this for you.
JohnCL said:That's actually quite a confusing question, especially since you originally said "We bought my wife's grandads Council house for him back in '98. He held it in trust for us till he died."
Also, I wonder when we actually 'acquire' it, on his death when it finally passes into our names from G'dad's trust or when we paid over the cash in '98.
This doesn't make a lot of sense. You either bought it yourselves in 1998 and your name(s) are on the Deed in which case you acquired it in 1998, or else you lent him the money to buy it (ie. his name is on the Deed) in which case you don't acquire it until his death.
My mother did a similar thing but used some legal agreement ("reversion to settler" or something?) whereby the loan was not part of my grandmother's estate on her death and was therefore not liable for Inheritance Tax. You should make sure you have a similar arrangement or you may find you have additional tax to pay on your wife's granddad's death in addition to the CGT you are already prepared for.
Obviously you should seek professional advise on this!
>> Edited by JonRB on Monday 13th March 12:24
Sorry, I'm getting confused here with two seperate posters.
If you purchased a house as a buy to let, then the profit on that buy to let is subject to CGT - see my above posts on that.
If you've purchased a house which is then held in trust for you by another family member, then this is quite different. As the property passes to you, and assuming you already have another property as your main residence, then the property that was in trust isn't subject to the Home Owner's Relief. Once you have clear title, you're going to be in the same position as the original poster.
If you purchased a house as a buy to let, then the profit on that buy to let is subject to CGT - see my above posts on that.
If you've purchased a house which is then held in trust for you by another family member, then this is quite different. As the property passes to you, and assuming you already have another property as your main residence, then the property that was in trust isn't subject to the Home Owner's Relief. Once you have clear title, you're going to be in the same position as the original poster.
Sorry for the confusion. We paid all the cashand costs to allow G'dad to buy the house at the discounted price. It has been in his name but at the same time he executed a separate deed of trust holding it for us. He has now died. We have rented it out since he moved into a home in 2001. The rental income has come to us.
There won't be any inheritance tax on his estate as he is way under the limit.
Clear as mud eh?
John
There won't be any inheritance tax on his estate as he is way under the limit.
Clear as mud eh?
John
The date you acquired the property would normally be the date of death. The property is acquired at the Market Value at that date. If and when the property is sold, CGT is calculated on the difference between the Sale Proceeds less all the costs incurred on the disposal of the property. Indexation, Taper Relief and the individuals' personal CGT allowances are all deducted from the Net Proceeeds on disposal; before the final taxable gain is calculated.
Roll O ver relief can be used to "roll" an otherwise taxable gain into a new investment. As was mentioned earlier, this does not eliminate the taxable gain, but postpones it to a future date i.e. the date the follow on investment is eventually disopsed of (unless the gain on that is also "Rolled Over"
. There are limitations and restrictions on Roll Over relief and it is not allways applicable.
Roll O ver relief can be used to "roll" an otherwise taxable gain into a new investment. As was mentioned earlier, this does not eliminate the taxable gain, but postpones it to a future date i.e. the date the follow on investment is eventually disopsed of (unless the gain on that is also "Rolled Over"
. There are limitations and restrictions on Roll Over relief and it is not allways applicable.Gassing Station | Business | Top of Page | What's New | My Stuff