CGT on selling flat sub-let for five years?

[brodev]

My wife has owned and rented out a flat for the past 5 years. She is thinking of selling shortly and on current estimates she should realise a gain of around £50000 on which CGT will be due. I have been told that if she transfers the flat to me and then I sell it there will be no CGT due/ Can this possibly be the case?

[Tax Accountant]

The apparent advice given to you or your inderstanding of it is not correct. A couple can benefit for CGT exemption for only one property which is their only or main residence. As neither of you have used the flat as such, neither of you could benefit from the PPR relief. CGT will be charged to whoever owns the flat at the time of the disposal.

On the face of it, it may be better if the flat is first transferred into your joint names and then sold. This will allow reduction of each spouse's share of the gain by £8,500 annual exemption, ie two lots of £8,500 will be allowed. Additionally, there will be taper relief of approximately 15% in respect of 5 years' ownership of the property. Any remaining gain is added to each persons other taxable income and gains of the year of disposal and taxed at 10%, 20% and 40% according to how much of the gains falls into each of these tax bands.

Whether the property is sold by your wife or transferred into joint names and then sold will depend on the benefit of one extra £8,500 exemption to be weighed against the tax rates suffered by each one of you.

Ramnik

[brodev]

Thanks Karongo, I thought the pub knowall was too good to be true. He had said that a wife can transfer to her husband at todays value and that that would incur no CGT. Then the husband could sell and he would have no profit therefore no CGT. Still it was a nice dream

[Tax Accountant]

Your friend is right to a certain extent. Perhaps this is a classic example of the saying that half knowledge is dangerous.

Normally, transfers between connected persons are deemed to be at market value, even if it has been transferred as a gift. If so, the transferor is taxed as if it has been sold at full market value and the transferee also takes over at the same full market value for future CGT purposes.

However, there is one exception to the above. This is in respect of transfers between spouses who are legally married and living together as such. These transfers are effectively at the total cost of the transferor. Effectively, the transferee steps into the shoes of the transferor. The correct term is 'transfer at no gain/ no loss value'. Therefore, all the inherent gain, and the related CGT thereon, is taken over by the transferee.

I hope this explains the position fully. But do consider the advice in my previous reply about transferring the property into joint names if this is beneficial to you, especially if you are seriously considering selling it.

Ramnik.

[brodev]

Thanks again Karongo. we shall put it in joint names, but your reply has raised a question. Can she transfer the flat at todays value to our son and them have him sell it with no CGT and then gift the money back to us? A bit complicated I know but I don't like giving to the tax man unless I have to.

[Tax Accountant]

If your wife transfers the flat at any value to your son, she will be charged to CGT on the profit based on the full market value.

Ramnik

[brodev]

Again thanks. Seems like they have thought of everything :rolleyes:

[Tax Accountant]

Well, if they allow properties to be transferred to children CGT-free and then the children to sell on at the full value CGT-free, everyone would be at it. Just be thankful of the large gain made, not to mention the rents received in the meantime. If anything, CGT has so many exemptions, allowances and reliefs that the final CGT bill in most cases is relatively small. Also exempt transfers between spouses is a very generous relief.

Ramnik

[brodev]

Continuing in reducing CGT where can I get info on what can be set against CGT, eg installation of central heating and decorating etc? What can be set off and what cannot?

[Nora Kay]

Brodev
You can see the leaflet CGT1 by going to www.hmrc.gov.uk/leaflets then scroll down to "Capital Gains Tax", then hit CGT1.
You will then get the online copy of the leaflet, but you can also get the hard copy from any tax office. There is a lot of stuff about selling shares etc but if you just want to know about selling property, go straight to that section. It tells you all you need to know to work out the gain yourself. When you have done that, you can phone the helpline on 0845 9000 444 (8am to 8pm) to check that your calculations are correct. I have found them to be very helpful.
Karongo
I can't find any reference to the situation where the property is put into joint husband/wife names immediately before selling in order to benefit from 2 exemptions. Have you had this OKed by the Revenue? Sounds too good to be true!

[Tax Accountant]

Brodev,
Central Heating installation cost is allowable but decorating is not. Broadly, large capital expenditure which is an improvement to the property is allowed but ongoing maintenance which is not reflected in permanent increase in value of the property is not allowed.

Nora Kay,
If you can establish that it was transferred to joint names first, then there can be no argument that it should be taxed to both spouses and therefore 2 x annual exemptions are available. Obviously, the Inland Revenue will not say that this is acceptable but they have no choice but to follow the law. However, the property must be transferred for real and not only on paper.

Ramnik

[brodev]

However, the property must be transferred for real and not only on paper.

Ramnik
What exactly does this mean? I was going to have the property transferred to joint names and then put it up for sale. Do I have to do anything else? Again many thanks for the ongoing help.

[Tax Accountant]

It must be transferred on the title deeds without any reservations or conditions, ie your wife will be entitled to keep half the sale proceeds if she chose to do so.

Ramnik

[brodev]

Still trying to get out of paying CGT. Is there any way my wife and I can move into this flat and call it our main home, then, in 1-3 years time, sell it on and be able to claim things like letting relief and residential relief. we are in no rush to sell and as the IR don't send me an annual tax form to fill out I don't want to startto have to fill one out every year.

[Tax Accountant]

Still trying to get out of paying CGT. Is there any way my wife and I can move into this flat and call it our main home, then, in 1-3 years time, sell it on and be able to claim things like letting relief and residential relief. we are in no rush to sell and as the IR don't send me an annual tax form to fill out I don't want to startto have to fill one out every year.

If you are able to move into this flat as your only or main residence, you will qualify for PPR relief for the last 3 years of ownership. This would be so even if you have lived in the flat for only 1 year.

Additionally, your wife will also qualify for the valuable lettings relief of upto £40,000. This will be £80,000 if the flat is owned by both of you.

In short, your gains will be fully covered by exemptions and reliefs if you have used the property as your only or main residence at anytime in your ownership and also let it as residential accommodation at anytime in your ownership.

If you have another residence as well, only one residence can qualify at a time for PPR relief. You will automatically be entitled to PPR relief for the residence which is the MAIN residence as a matter of fact. However, if you wished, you would be able to nominate PPR relief in favour of the residence which is NOT your main residence if this would be more advantageous to you. Such a nomination has to be made within 2 years of having more than one residence.

As far as the tax returns are concerned, surely you or your wife is receiving the returns and declaring the rental income each year!

Ramnik

[brodev]

The flat was rented out at a nominal rent to our son who was unwell. He is now fully recovered and is making his own way. As the rental income was no where near my wife's allowance there has been no need to inform the revenue.

[brodev]

as far as Main residence is concerned. My wife and i have lived in our house for the past 6 years. and my son in the other one for 5 years. we sold our original home in order to be able to buy 2 properties. One for ourselves and the other for our son. Does this mean that we are too late to claim the flat as our main residence? Naturally we are delighted at the improvement of our son's health but, at the time we bought the flat, CGT was not to the forefront of our minds.

[Tax Accountant]

as far as Main residence is concerned. My wife and i have lived in our house for the past 6 years. and my son in the other one for 5 years. we sold our original home in order to be able to buy 2 properties. One for ourselves and the other for our son. Does this mean that we are too late to claim the flat as our main residence? Naturally we are delighted at the improvement of our son's health but, at the time we bought the flat, CGT was not to the forefront of our minds.

You cannot claim a property to be your main residence if it has not been your residence AT ALL. As you state, your son lived in the house, so how can it be your residence? Moreover, you have your separate residence in any case.

But as stated in my last reply, you could actually move into the flat as your ACTUAL MAIN RESIDENCE. This will help with the CGT if and when you sell.

Ramnik

[brodev]

Thanks again karongo. I am a bit confused. We have owned both the properties for over 5 years. My understanding from your previous statement is that a selection has to be made within 2 years of ownership of both properties. yet you last statement( which I hope is correct) suggests that we still have time to make this selection.

[Tax Accountant]

Thanks again karongo. I am a bit confused. We have owned both the properties for over 5 years. My understanding from your previous statement is that a selection has to be made within 2 years of ownership of both properties. yet you last statement( which I hope is correct) suggests that we still have time to make this selection.

Please clarify where I suggested that you still have time to make the nomination for MAIN residence.

To repeat, you need to use two or more properties as your RESIDENCE and in that case you have a period of two years from the date of availability of two or more residences to make the nomination. A new two year period commences every time there is a change in your residence circumstances. For example, if you have been letting a property for five years and the tenant leaves, you could start occupying that property as your residence. In that situation, you would have a new two year period for the nomination as your MAIN residence.

A nomination does not wipe away the previous lettings period; it merely commences a new PPR exemption period from the date of nomination.

Ramnik

[brodev]

I am sorry karongo. You have been more than helpful. I have understood ,incorrectly, that the 2 year period only took place from date of ownership. As you have now explained I and my wife can now move into the flat and then claim it as our main residence. I am extremely grateful for your time and patience with me. if you would be so kind and answer 2 more questions. 1, Do I have to inform anyone officially of the change of main residence and 2, Is there any minimum time period that we have to occupy the flat as our main residence before we can put it up for sale?

[Tax Accountant]

I am sorry karongo. You have been more than helpful. I have understood ,incorrectly, that the 2 year period only took place from date of ownership. As you have now explained I and my wife can now move into the flat and then claim it as our main residence. I am extremely grateful for your time and patience with me. if you would be so kind and answer 2 more questions. 1, Do I have to inform anyone officially of the change of main residence and 2, Is there any minimum time period that we have to occupy the flat as our main residence before we can put it up for sale?

(1) If you have moved into the new property lock, stock and barrell and occupy it as your main residence as a matter of fact, there is no need to notify anyone of this. You will need to keep a record of this date for future reference if and when you sell this property.

(2) There is no minimum time to live in the property to qualify for CGT PPR exemption. This test depends on the quality of your residence and not the length of occupation. However, if you live in there for say at least 6 to 12 months, this should be sufficient.

Finally, if and when you sell the property, your capital gains could be fully or partially exempted from CGT depending on how many months the property qualified as your residence and how many months it didn't. The part of the gain which didn't qualify for residence relief, could be further reduced by lettings relief, taper relief and annual exemption.

Therefore, just because you occupied the property as your residence for a given period, doesn't necessarily mean that all capital gains are wiped off forever. Each case depends on its own facts. The exact calculations changes as time passes.

Ramnik

[brodev]

Again many thanks karongo. A donation has been made to "save the children" fund on you behalh. I hope you approve

[Tax Accountant]

OK Thank you for your gesture.

Ramnik

[shadowman]

I have a property bought in 1995. I lived in it briefly before being made redundant. I then moved back with parents and let the property because i couldnt sell it.

I then found another job which meant i had to work away and commute home (to parents at weekends)

The property has been vacant since 1999 though my belongings are there. I visit it occasionally and suppose it could be classed as my main residence as i dont own or have any financial interest in my parents home.

I pay C Tax at the property. I have now decided to get married and am concerned that i may be liable for CGT on this property if i sell it to buy another home as i read somewhere that PPL is only available on properties that are your main home and you have lived there throughout the period of ownership.

Can someone set my mind at rest????


Thanks

[Tax Accountant]

I have a property bought in 1995. I lived in it briefly before being made redundant. I then moved back with parents and let the property because i couldnt sell it.

I then found another job which meant i had to work away and commute home (to parents at weekends)

The property has been vacant since 1999 though my belongings are there. I visit it occasionally and suppose it could be classed as my main residence as i dont own or have any financial interest in my parents home.

I pay C Tax at the property. I have now decided to get married and am concerned that i may be liable for CGT on this property if i sell it to buy another home as i read somewhere that PPL is only available on properties that are your main home and you have lived there throughout the period of ownership.

Can someone set my mind at rest????


Thanks

(1) CGT is chargeable only in relation to the period when a property has not been your only or main residence.

On the basis of the property being used as your only or main residence for a short period at the beginning only, your exempt period will be the the number of months used as residence before letting the property plus a further 36 months. All other periods of ownership is chargeable to CGT.

Any chargeable gain is reduced by indexation allowance, lettings relief, taper relief and annual exemption.

(2) At present you have three possible residences. Your house, your parents house and the weekdays workplace property. Where you have more than one residence, you need to nominate, within 2 years, which one you consider to be your MAIN residence for CGT purposes.

As you have not been aware of the need to make this nomination, you should make a late nomination to your tax office and nominate your own house as your main residence. You could do so provided you are not letting the property and also use it as your residence sometimes.

You may also qualify for other exemptions relating to living away from home due to work.

Ramnik