How can I reduce my potential CGT bill?

[Sananda]

I have a flat I bought in 1995 for £61,000. Thereafter I spent £31,000 in 2004 remodeling it and am in the process of spending £14,500 extending the lease. It was valued in September 2008 at £240,000 (assuming the lease was extended). There is an outstanding mortgage of around £86,000.

I have never lived in the flat (throughout the period I have lived in a house I own) and it has been let throughout.

I would like to give this flat to my son so long as he takes over the mortgage. I realise there will be a CGT liability. Could I reduce it by living in the flat for a period (if so, for how long)? Or are there any other steps I could take?

Thank you very much.

[Telometer]

You would have to live in it. And by "live" I mean "live" - not stay. Move out of your current house and rent that one out. As you would clearly be intending to move back to your current house (?) I suggest you should probably live there for at least one, maybe two years.

If you were to sell your current house (tax free) and move into the flat, then you could probably buy somewhere else after a shorter period, say six months.

On the other hand, the tax payable is under 30k. Probably simpler just to pay the tax... Why not give the house to your son and move into the flat? That would probably solve all your tax problems.

[Sananda]

Thanks for replying so quickly.

Yes, I would be intending to return to the house (which I want to keep rather than give to my son). Although I don't mind moving into the flat for a year, I can't rent out the house as I have another son living there with me right now and he would remain.

What sort of saving to you think I would make by moving into the flat for a year?

[TaxationPete]

You would have to move into the flat lock, stock and barrel as your only home and it sounds as though that would not be the case. Add to this that after say 1 year you moved back to your original home then HMRC are highly likely to decline your claim to PPR. Tekk me more about the flat and what exactly you spent money on. Was it revenue and you deducted it from rental income or what if any of the cost were capital in nature and deductible from the capital gain. Regards Peter

[Sananda]

Hi Peter.

Thanks for your reply.

I'd quite like to move into the flat for a while. There isn't enough space in the flat (three people and two bedrooms meaning the living room is a bedroom right now). My son or sons would have to pay the expenses at the house though.

I changed the layout of the flat in 2004 from a two bedrooms, kitchen and living room to one bedroom and an open plan living/kitchen area.

The cost of this was not counted as an expense against rental income.

[TaxationPete]

Did you knock down walls and change the structure of the property. I doubt your plan og moving in, but then moving back to your real home will pass the HMRC PPR check. I would suggest you run some numbers and face the fact that you have done well and there will be a CGT bill. It was not long ago when that could have been 40% depending on your other income so 18% CGT flat rate is cheap. Perhaps you son would pay the CGT bill and accept the mortgage so he can own this property. Regards Peter

[Sananda]

Yes, walls were knocked down.

Oh yes, my son will have to reimburse me the tax bill!

[TaxationPete]

If all the £31K could be declared as enhancement capital and of coarse the extended lease cost then a transfer of the property at OMV (£240,000) would raise a CGT bill of around £22,200, less than 10% of the open market value. Cheap really.

[Sananda]

Thanks you for your kind help.