Will we pay CGT?

[susiewong]

Hi, we are new to this and would appreciate some advice. My Partner lived in his council flat for about 11 years and then bought it at a greatly reduced price in July 2005. In the August he moved in with me and rented it out because Council rules say he is not permitted to sell until 3 years after purchase & the rent would pay the mortgage. He would like to sell it in 2008 when he is permitted. Would it be subject to CGT? If so would the gain be from the reduced price he paid or the market value of the property at the time of sale? Any help would be appreciated.

[Melboy]

Talk to the Inland Revenue. They use a formulae for calculating CGT on property that was previously occupied and subsequently rented out and then sold on at a future date.

You will probably have to pay a small proportion of CGT, but don't forget there is a CGT personal allowance of around £8500 before it becomes payable. Might pay you to go into joint names to claim a full £17,000?

I would also have a chat with Property Tax Accountant they will ultimately save you money over their bill.

[plym77]

Hi Susie

Thanks for posting as a new topic - it was only by chance I cam across it previously

You may not pay Capital Gains Tax (CGT) at all on this property.

As the property was your partners PPR for July 2005, that month will be exempt under Principal Private Residence Relief (PPR). By virtue of owner occupation, the final 3 years of ownership will therefore also be excluded under PPR.

Therefore, providing the property is sold by August 2008, no CGT will be payable as the whole property will be covered by PPR.

However, if it is sold after August 2008, then there may or may not be CGT payable.

By virtue of the property being owner-occupied at some point, the fact that the property has subsequently been rented out, affords an additional relief - 'Letting Relief' - this relief is given as the lower of £40,000, the PPR relief given, and the gain left in charge.

After the above two reliefs you would then be entitled to 'Non Business Asset Taper Relief' - a discount afforded to an asset held for more than 3 years (the relief increases with ownership length), and finally there is a CGT annual exemption (currently £8800) before any tax is due.

An exemple of how this works:

Miss A purchased a property in August 1998 for £85,000. She lived in the property for the first 4 years, then let it out until sale in September 2008. The sale proceeds were £300,000.

£

Proceeds 300,000

Less Cost (85,000)

Gain 215,000

Less: Exemption for owner-occupation:

First 4 years

Last 3 years £215,000 x 7/10 (150,500)

64,500

Less: Lettings Relief

Lower of: a)PPR Relief (£150,500)

b)gain in let period (£64,500) (40,000)

c)£40,000

Gain left in charge 24,500

Less: Non Business Asset Taper Relief = 40% (9,800)

(property owned for 10 years)

14,700

Less: CGT Annual Exemption (8,800)

Net Taxable Gain 5,900

Tax due (assuming higher rate) =2,360

In addition, if you are married there are further opportunities available, which if is appropriate, I can explain further.

I hope this helps - any more questions on the topic, let me know

Regards

Plym77