Tax Situation

[creditcrunch]

Apologies in advance for a potentially dumb query. My wife and I got married a month ago. We both owned separate flats before our wedding. We moved in together six months ago into her flat but due to the housing market collapse we have been unable to sell my flat. I have put my flat up for rent. My research says we both have to declare the flat we jointly live in as our main residence and pay CGT on my own flat if I rent it or eventually sell. What tax relief can I legitimately claim on selling the house in 2 years time ( I have read the boards and understand the deductions allowable while renting but the tax situation on sales in my situation remains unclear). Thanks for any advice.

[Preston]

Hi

Its not a dumb question its quite a difficult one. I always find the tax issues even more difficult than the landlord and tenant ones.

As I understand it, there are two potential scenarios for you:

1) Even if you no longer live in your property, you can still qualify for the full amount of private residence relief, provided that:

• the property has been your main home from the time that you bought it
  
• it has otherwise fully qualified for private residence relief (for example, you have not used part of the property exclusively for business purposes)
  
• you sell it within three years of moving out or it no longer being your main home
  
  
  It's worth bearing in mind that:
  • when working out the chargeable gain you can deduct some of the costs of buying, selling and improving the property
    
  • if you have made a loss on the property, you may be able to set that off against other chargeable gains you may have
    

  As I understand it, for 2008-2009 onwards it is proposed that there will be a single rate of Capital Gains Tax of 18% for individuals (charged on the remaining profit, after your allowances and deductions described above).

  Hope this makes sense, but if not I would recommend some of the government leaflets on the subject. They will probably be more up to date that some of the books and are fairly easy to read. As for books, Taxcafe does the best one I've found so far.

  Have fun!

  Preston

[plym77]

Hi

There are a few issues you need to consider here and I would suggest you get a tax adviser to look at this in more detail. An expense now could set this up for you in the most beneficial way.

I am a chartered tax adviser and hope that this will help:

- Yes, if you sell your property within 3 years of leaving it, it will be exempt from CGT

- If you have it more than three years you will be entitled to lettings relief - this can be worth up to £40k per owner-occupier (but the actual figure depends on a few factors, max is £40k).

- You can only have one PPR at a time.

There could be ways to improve the situation:

- Did you marry before you moved in to the flat? What was the timing?

- Is the property still vacant? is it furnished? is there the possibility you and your wife could consider living in the property short term?

There could be a few opportunities here to increase your allowances on future disposal of the property if you think it will not sell within 3 years and substantial profits could be made , but this planning is time sensitive - 2 years from leaving the first property.

The other issue is profit splitting and whether this is set up in the most beneficial was for you - particularly if one of you is higher rate, one basic rate. It doesnt always mean giving away large elements of capital to substantially reduce tax liabilities.

Also, ensure that your loan interest planning is structured most beneficially for you. You may wish to consider a restructure of finances to get a higher qualifying interest element. The calculations will depend on the figures

If you would like to explore this further, feel free to email me and we can go from there.

Regards

Sherena