Does Capital Gain Push You Into A Higher Tax Bracket?

[PAUL888]

My parents own a house which is currently rented to me. If they sell the house -bought in 1994 for £50 000, for £150 000 will the capital gain be taxed at their highest rate of income tax which is currently 22% or will some or all of it be taxed at 40% because the gain will increase their income for the year. ie will the profit on the house be added to their income to push them into a higher tax bracket? My father's gross pension is £21 000, my mother's gross income is £10 000 pa so both are currently paying 22% income tax maximum.
thankyou

[Tax Accountant]

My parents own a house which is currently rented to me. If they sell the house -bought in 1994 for £50 000, for £150 000 will the capital gain be taxed at their highest rate of income tax which is currently 22% or will some or all of it be taxed at 40% because the gain will increase their income for the year. ie will the profit on the house be added to their income to push them into a higher tax bracket? My father's gross pension is £21 000, my mother's gross income is £10 000 pa so both are currently paying 22% income tax maximum.
thankyou

All taxable gains are added to all taxable income. Therefore, taxable gains forms the top slice of the combined total. In your case, some of the gain will fall into the basic rate band and that part will be taxed at 20%. Rest of the gain will fall into the higher rate band and will be taxed at 40%.

It doesn't make sense to me that your only or main residence is actually rented by you from your parents. Not only are your parents paying income tax on the rents but they will also be taxed to capital gains based on the market value if they now transfer the property over to you.

If the property was owned by you, there would have been no income tax and no capital gains tax.

Ramnik

[TaxationPete]

If they purchased the house in June 94 and sold it in 07/04/07 then the CGT would be £4853 for Dad and £4160 for Mum. There are expenses that they can offset against the gross gain and the Tax thresshold will be very slightly different in April but I have allowed for the £9,200 CG annual Allowance. If the gift you the house the CGT would be the same as it is a Disposal. Have you lived there since they bought it and no other tenant. ? Regards Peter

[PAUL888]

Pete

thanks for your advice. I have lived there s ince theybought the house and there have been no other tenants. How did you work out the figures - I am buying a copy of tax calculator software but it would be useful to know how you arrived at them.

Paul

[TaxationPete]

I use an Income and Capital Gains Tax Calculator that uses all the HMRC thresholds, tax codes, allowances and salary. Obviously with CGT it includes Indexation, if applicable, Lettings Relief, Taper Relief and Personal CG Annual Allowance. I assure you the figures are spot on. However for you single calcuation you do not need to bye S/W you just need to understand the parts that would effect you parents. Did you parents but the property with the sole intention of you living there and did then register it as a rental property with the LA and HMRC. ?? Regards Peter

[PAUL888]

They bought it as an investment to rent out, then I split up with my girlfriend so needed a place to live and rented it off them. They set up a tenancy agreement. Now they want to sell it so I'm moving out.

Paul

[Tax Accountant]

They bought it as an investment to rent out, then I split up with my girlfriend so needed a place to live and rented it off them. They set up a tenancy agreement. Now they want to sell it so I'm moving out.

Paul

Rather than moving out, why don't you consider buying it from them? Your rental may more or less cover mortgage repayments.

Your parents could sell say a 1/3rd share to you this year and their gain on this will more or less be covered by their CGT annual allowance. They could then sell the other 2/3rd share to you over the next couple of years. This way they may not have any CGT liability.

If this is an option, you should all seek professional advice.

Ramnik