CGT on a Buy To Let property

[MrShed]

Hey Karongo this question is for you....sorry I know you have answered loads of these questions but thought you might be able to help me specifically!

My parents have owned a flat purely for rental purposes for ten years. It was bought for £27500, and is now worth between £85-90000. It has never been lived in by them. Do you know roughly around how much CGT would be payable on this...I know you wouldnt have a clue exactly how much! And how could we limit the amount of CGT - how long would one of my parents have to nominate it as their PPR before it would make a big difference to the amount of CGT payable? And would it be possible, or tax effective, to transfer ownership to me and I would live there for a while to limit the CGT?

Thanks in advance

[susan 2]

Mr. Shed - Don't know if this may help you. Am just in the middle of a very detailed book on tax entitled "How to avoid Property Tax" by Carl Bayley. web site www.Taxcafe.co.uk. It seems to be very comprehensive. As usual I got it from the library. But may buy for reference in future. Susan

[Tax Accountant]

Hey Karongo this question is for you....sorry I know you have answered loads of these questions but thought you might be able to help me specifically!

My parents have owned a flat purely for rental purposes for ten years. It was bought for £27500, and is now worth between £85-90000. It has never been lived in by them. Do you know roughly around how much CGT would be payable on this...I know you wouldnt have a clue exactly how much! And how could we limit the amount of CGT - how long would one of my parents have to nominate it as their PPR before it would make a big difference to the amount of CGT payable? And would it be possible, or tax effective, to transfer ownership to me and I would live there for a while to limit the CGT?

Thanks in advance

Mr Shed,
I will try and answer your questions as best as I can.

First, there is a general misconception that people can simply nominate a property as their residence to mitigate CGT. It is not that simple. To qualify for PPR exemptions and related reliefs, one must have occupied the property as only or main residence or occupied the property as secondary residence (eg 2nd home) and then be able to nominate it as main residence.

In your parents' case, they have not occupied the property as their residence at all at ANYTIME in his ownership. They are therefore unable to claim PPR or related reliefs. If you occupy the property yourself, this does not help their position. Any transfer to you will be deemed a disposal by them at market value.

Their best bet is to actually occupy it as their main residence. Alternatively to occupy it as their 2nd home and then nominate it as main residence. If they are unable to do either, they cannot benefit from PPR reliefs.

In the absence of PPR relief, they are entitled to only indexation allowance to uplift the original cost by approx 10%. The remaining gain will be reduced by Taper Relief of 30%. Remaining gain is reduced by annual allowances of both parents (presently 2 x £8,500 = £17,000). Remaining gains will be added to each parent's other income and gains and charged to CGT at 20% and/or 40% depending on the tax bands in which the gain falls.

I estimate CGT bill of approx £5,000.

To mitigate this, they could transfer the property to you over say 2 to 3 tax years. So for example, they could transfer 1/3rd this tax year, 1/3rd next tax year and the final 1/3rd the tax year after next.

But they also need to consider IHT implications as well.

I hope this helps.

Ramnik

[MrShed]

As usual Karongo, a comprehensive and insightful answer, thank you.

One small question though....having read what I asked and you answered, I have realised I am not actually sure if the property is in both of my parents names, or just my mum's. How would this affect it? Roughly double the figure?

Thanks again

[MrShed]

Oh and thanks for the recommendation susan, I shall have a little look :)

[Tax Accountant]

As usual Karongo, a comprehensive and insightful answer, thank you.

One small question though....having read what I asked and you answered, I have realised I am not actually sure if the property is in both of my parents names, or just my mum's. How would this affect it? Roughly double the figure?

Thanks again

(1) If in one name only, it could easily be transferred to joint names. All transfers between spouses are exempt for CGT and IHT.

(2) If it remains in one name only when sold or transferred to you, this will result in one annual exempt amount available rather than the 2 x allowances otherwise available. This will increase the chargeable gains by £8,500 to approx £30,000. The CGT liability will depend on whether, and by how much, this takes her total taxable income and gains into higher rate bracket. If £20,000 is charged at 20% and the other £10,000 at 40%, total bill will be £8,000.

Ramnik

[MrShed]

Thanks Ramnik for the info....much appreciated....I must say that your contribution to these forums is undervalued by many, so just to point out that it is not by me :D

[Tax Accountant]

Thanks Ramnik for the info....much appreciated....I must say that your contribution to these forums is undervalued by many, so just to point out that it is not by me :D

Mr Shed,
Thanks for the compliment. Much appreciated. If only everyone realised how much difference a simple 'thank you' makes, especially after receiving detailed reply to their queries. If only ythey realised how much professional time-costs they would incur if they went to an Accountant.

Ramnik

[Grange]

One or two more thoughts.

If you parents do have it as a second home for a while, and nominate it as PPR, you may find it has a much worse effect on the potential CGT if they come to sell their own house.

When considering transfer of the flat to you, there will be CGT to pay at the time of the transfer.

Transferring the property to you one third at a time may well incur sufficient professional fees to make it easier just to pay the tax. By the time you've split future rental income three ways and filled in your tax returns you might just wish you hadn't done it!

Quite how Ramnik guessed at a CGT bill I've no idea. I'll go with his overall chargeable gain of something like 35,000. How much the CGT itself is will depend on whether other disposals are made in the year - such as shares and whether your parents have other income.

[Tax Accountant]

One or two more thoughts.

If you parents do have it as a second home for a while, and nominate it as PPR, you may find it has a much worse effect on the potential CGT if they come to sell their own house.

When considering transfer of the flat to you, there will be CGT to pay at the time of the transfer.

Transferring the property to you one third at a time may well incur sufficient professional fees to make it easier just to pay the tax. By the time you've split future rental income three ways and filled in your tax returns you might just wish you hadn't done it!

Quite how Ramnik guessed at a CGT bill I've no idea. I'll go with his overall chargeable gain of something like 35,000. How much the CGT itself is will depend on whether other disposals are made in the year - such as shares and whether your parents have other income.

Dear Mr Grange,

(1) To have one's PPR not qualifying for PPR as a main home for a while, should not normally have much, if any, impact on the CGT when this is sold in due course. This is due to the many reliefs and allowances available to set off against any chargeable gains.

(2) QUOTE: 'When considering transfer of the flat to you, there will be CGT to pay at the time of the transfer.'

REPLY: Surely this is the reason for the query in the first place! Am I missing something here?

(3) Transferring the property 1/3rd at a time should not incur that much professional fees if this is done by way of a Trust deed. In any case, I think Mr Shed is still at a probing stage. If you really ask me, I don't think that the transfer will happen at all in the foreseeable future.

(4) I actually calculated the chargeable gain in the sum of £39,000 less 2 x £8,500 annual exemptions = £22,000 taxable gains at 10%, 20%, 40% or a combination of these. I estimated the CGT in the sum of £5,000 on the basis that Mr Shed's parents are probably elderly, would not be in higher rate tax band and most probably would have their annual exemptions available against the gains on the flat. Mr Shed only asked for a rough estimate and realised himself that it would be difficult to do the sums without full information. If he wanted precise calculation, he would no doubt have provided precise information.

Ramnik

[Nora Kay]

Ramnik
Following on from your statement that if the property were now to be put into joint names, there would be 2 exemption allowances on selling, can you please tell me how long it has to be in joint names before the tax man will give the 2 exemptions?
My husband has a house in his sole name which has been let for about 35 years, and which he now wants to sell. If the property is transfered to our joint names this week, and we sold it next week, would the full double exemption apply immediately? Do you have experience of any cases where this has been allowed?
This seems to me to be almost too good to be true, as the tax man usually plugs loop-holes of that sort pretty smartish!
Nora

[Tax Accountant]

Ramnik
Following on from your statement that if the property were now to be put into joint names, there would be 2 exemption allowances on selling, can you please tell me how long it has to be in joint names before the tax man will give the 2 exemptions?
My husband has a house in his sole name which has been let for about 35 years, and which he now wants to sell. If the property is transfered to our joint names this week, and we sold it next week, would the full double exemption apply immediately? Do you have experience of any cases where this has been allowed?
This seems to me to be almost too good to be true, as the tax man usually plugs loop-holes of that sort pretty smartish!
Nora

Regarding your final paragraph, this is really small fries to him and is not really a loophole. He has a lot of bigger fishes to catch where the money at stake is in another league.

As far as the current law is concerned, all that matters is who actually owned the property at the date of sale. As far as any caveats are concerned, you need to ensure that the buyer is not already identified and sale agreed in all but name before transferring into joint names. Subject to this, there should be no other concerns. When you really think about it, a lot of things can change between transferring the property to joint names and actually completing a sale. Therefore, the taxman will not see this a pre-conceived transaction.

You should ensure that the transfer into joint names is properly documented and is available to be produced to the Tax office if necessary.

There is no set timescale for it to be held in joint names before selling to be effective. In theory, you could add another name today and sell it tommorrow.

Needless to say, you should address the issue from all different angles to ensure that there are no disadvantages arising from other issues.

Finally, you should always seek professional advice before concluding any tax related transaction where the amount of tax at stake warrants it.

Ramnik

[Nora Kay]

"When you really think about it, a lot of things can change between transferring the property to joint names and actually completing a sale. Therefore, the taxman will not see this a pre-conceived transaction."



Thank you Ramnik for your reply.
Am I right in thinking that if the taxman did put 2 and 2 together and conclude that this was a "pre-conceived transaction", he would class it as an attempt at tax evasion, rather than legal tax avoidance, and disallow the 2 exemptions -or worse?

Nora

[Tax Accountant]

"When you really think about it, a lot of things can change between transferring the property to joint names and actually completing a sale. Therefore, the taxman will not see this a pre-conceived transaction."

Thank you Ramnik for your reply.
Am I right in thinking that if the taxman did put 2 and 2 together and conclude that this was a "pre-conceived transaction", he would class it as an attempt at tax evasion, rather than legal tax avoidance, and disallow the 2 exemptions -or worse?

Nora

It is not just enough to put two and two together. All the final steps must also have been lined up such that nothing can intervene between the transfer and ultimate sale.

As I stated before, in your case, the property has not even been put up for sale (I assume), let alone finding a buyer and exchanging contracts with him/her. Therefore, your transfer cannot fall within the definition of a pre-conceived transaction.

If your husband had already exchanged contracts before transferring into joint names, this would be caught under the anti-avoidance legislation.

I hope this helps. However, you are again advised to seek professional advice before proceeding and not to rely solely on my opinion.

Ramnik

[Nora Kay]

Ramnik
Thank you for your advice.
I think we fall between the two scenarios in that the property has now been put up for sale and, despite the general slow-down of house sales, has immediately attracted an acceptable offer. No contracts have been exchanged as yet of course, and the completion is not likely to be before the new year, so it could be feasible for the house to be put in joint names at this stage.

This does give rise to various other issues which will have to be considered carefully, as you pointed out earlier, so we shall take your advice to consult an expert before proceeding.

Many thanks
Nora

[Tax Accountant]

Ramnik
Thank you for your advice.
I think we fall between the two scenarios in that the property has now been put up for sale and, despite the general slow-down of house sales, has immediately attracted an acceptable offer. No contracts have been exchanged as yet of course, and the completion is not likely to be before the new year, so it could be feasible for the house to be put in joint names at this stage.

This does give rise to various other issues which will have to be considered carefully, as you pointed out earlier, so we shall take your advice to consult an expert before proceeding.

Many thanks
Nora

Nora,

The sale has not been contractually agreed in that contracts have not been signed. The potential buyer could change his/her mind, you may refuse to sign the contract as a joint owner, someone could come up with a higher offer etc.

The way I see is that you have nothing to lose by transferring it into joint names. When completing self-assessment tax returns, make sure to use the 'additional information' box in the tax return to state the fact that the property was transferred into joint names before any contracts were exchanged and therefore the sale is considered to be by both joint-owners and hence it has been declared as such in both persons' tax returns. This way, if challenged, you could have an open debate with the taxman. At worst you will fall back into the single allowance situation which is the situation now any way, so you would not have lost anything.

You need to ensure that there is no loss of PPR relief as a result of the transfer into joint names if the property has ever been occupied as your husband's only or main residence at anytime in his ownership.

You could also review possibility of occupying the property as your 2nd residence (not necessarily the main residence), nominating as your main residence for CGT purposes for 1 week (in practice it would be prudent to carry on until it is sold), and then revert the nomination to the main property. This will allow the final 3 years to be eligible for PPR relief and also make you eligible for valuable lettings relief of upto £40,000 for each joint owner. This possibility is actually referred to in the Inland Revenue manuals which are available to view on the H M Revenue and Custom's website.

It is best to sit down with a competent accountant well versed in the property related CGT issues and review all the facts and decide what is best, always ensuring that you work within the law and that you do not rely on any lies to the Inland Revenue for your chosen course actions to stand up if challenged by the taxman.

Ramnik

[Nora Kay]

Ramnik
Many thanks for this further information.
The plot thickens, as 2 weeks ago we bought a house to be our PPR in another county, although we have not yet sold our current residence.
So, we could now nominate the house that has been tenanted, but never previously owner-occupied, as our PPR, after transferring it to joint ownership, until it is sold. This would not affect the status of our current residence, for which there is I believe 2 years leeway for it to be sold.
The new private residence would be a second home until nominated as PPR on the sale of the formerly tenanted house. Can I assume that on a subsequent sale of the new PPR, it would be fully exempt from CGT, despite it having been a second home for a short period?
Can you confirm that this would be the best action to take to pay the least CGT overall?

[Tax Accountant]

Ramnik
Many thanks for this further information.
The plot thickens, as 2 weeks ago we bought a house to be our PPR in another county, although we have not yet sold our current residence.
So, we could now nominate the house that has been tenanted, but never previously owner-occupied, as our PPR, after transferring it to joint ownership, until it is sold. This would not affect the status of our current residence, for which there is I believe 2 years leeway for it to be sold.
The new private residence would be a second home until nominated as PPR on the sale of the formerly tenanted house. Can I assume that on a subsequent sale of the new PPR, it would be fully exempt from CGT, despite it having been a second home for a short period?
Can you confirm that this would be the best action to take to pay the least CGT overall?

Nora,

You must remember that you cannot simply nominate a house as a PPR without actually using it as your residence. In theory you could simply use it as your 2nd residence and nominate it as your PPR for CGT purposes. However, you have to be able to convince the taxman that it was used as your residence if put to the test. This forum is not an ideal medium to discuss the merits of your case and what would or wouldn't be acceptable as your 2nd residence immediately prior to the sale of the let property.

I still say that you must work within the law. It then does not matter if the taxman does not like the tax consequences of what the law allows you to do.

To be absolutely on the safe side and avoid any arguments, it would be best to move in the let property and actually make it your main residence. Then to register all utilities and council tax etc in your names. Strictly, there is no set time limit for you to stay in the let home to qualify it as your PPR but I would recommend at least 3 months in your circumstances. After a suitable period, you could then move straight into the new home which you have already bought. It is not necessary to stay in the let property until it is sold before moving into the new house.

In the meantime, you could redecorate and renovate your present main residence with a view to getting it in a peak selling condition. You have final 3 years ownership automatically exempted from CGT if it has been your only or main residence at anytime in your ownership.

As far as the latest (3rd) property is concerned, you have 12 months before moving in. Where it needs extensive work doing to it, this period could be extended further by application to the tax office. So, if you move into the new house within 12 months of purchase, there is no problem. Any small excess period is deemed chargeable period but would normally not attract any CGT due to various allowances and exemptions.

Professional advice is recommended before taking any final decisions. Do not rely simply on the advice given in this forum.

Ramnik

[Nora Kay]

Thank you once again Ramnik for your clear advice.
Nora

[Tax Accountant]

QUOTE FROM LAST REPLY:''As far as the latest (3rd) property is concerned, you have 12 months before moving in. Where it needs extensive work doing to it, this period could be extended further by application to the tax office. So, if you move into the new house within 12 months of purchase, there is no problem. Any small excess period is deemed chargeable period but would normally not attract any CGT due to various allowances and exemptions''.

Nora, The last sentence above should read that if the 12 month period is exceeded, the whole period is deemed chargeable and not only the excess. Apologies for the error.

Ramnik