Advice please Plym77?

[Gerry.B]

I would greatly appreciate some advice on Capital Gains Tax. I have noticed Plym77 you have gave some really good info to people regarding this. Im sorry if it just sounds the same as everyone else's situation but you always want to hear it first hand for yourself, if you could help i would be very greatful. Here is my situation;

Bought house in 2000 as my residence for £62,000

Re mortgaged in june 2006 with my wife to a buy to let for £84,000 (House actual value £125,000)

House will not be let out until start of September.

If we let the property out for 4years and sold some time in 2010 what kind of money would we have to pay in CGT?

Also are you taxed on the value of the house when you start letting ie £125,000 or do they get there figure from how much your mortgage is for ie £84,000. I wouldn't want to be getting taxed on capital already gained before letting.

Any advice will be great, thanks. Gerry

[plym77]

Hi Gerry

In order that I can give you a definitive answer, please can you let me know this further info:

1. You say that you have remortgaged and are looking to let the property - when did you move out? or when will you move out?

2. Is the property in joint names? and what is the split? (50:50, 70:30 etc)

3. Are you buying another property to live in? when? will you be mortgaging this?

4. How long have you been married, and does you wife also own property? the reason I ask is you say bought as 'my residence' - this may seem a bizzarre question but does have some baring

5. Do you have any other mortgages? Again... this does have baring

If you can let me know the above I shall post your answer over the weekend

Regards

Plym77

[Gerry.B]

Thanks Plym77,

We are currently still in the property, we intend to move out around the start of September.

When we remortgaged in june it was done in both our names. Im not sure what you mean about 50-50 / 70-30 split but we never specified it to be any other way than a joint mortgage, i presume 50-50.

We are buying a new home to live in, its a new build so at present we have a completion date of 26th of October but we will be staying at my parents home until it is ready. We will be taking a mortgage out on this property.

We only got married last September 05 so the property for letting has only ever been in my name until now, although we were living together for approx. 2 years. My wife does not own any other property. We have no other mortgages.

Thank you so much for replying Plym77 im sure your time is very valuable to you, this is very good of you. We are complete novices at this so we know nothing.

Gerry.

[plym77]

Hi Gerry

Firstly, my apologies for my dalay in posting... got a little tied up with the football on the weekend!

OK, in answer to your question, and firstly I have assumed that you bought the property in June 2000 (for ease) and secondly that the property is now in joint names (which it appears to be).

Capital Gains Tax:

If you sell the property by June 2009 you will definately have no Capital Gains Tax (CGT) to pay as the whole gain will be covered by Principal Private Residence relief (PPR), both deemed (last 36 months) and actual (period lived in).

If you sell in 2010, you may well have CGT, but only if the value of the property dramatically increases. This is because you would only be taxed on any excess over PPR, lettings relief (x 2 for you and wife), taper relief (exempting 40% of the remaining gain) and a CGT annual exemption each (currently £8.8k each). I would say that the property would need to be worth a huge amount to even begin to pay tax - probably double or treble or even quadruple... therefore it is highly unlikely you will need to pay any tax, however, if it is not purely exempt under PPR then you will need to report the transaction on a self assessement tax return.

The thing to remember is the longer the property is owned after it is no longer your PPR, the more the PPR exemption is diluted, eg, if the property is your actual PPR for 7 out of 10 years, then the whole gain is exempt (being 7 years actual, last 36 months deemed), however, if it is only your PPR for 7 out of 20 years, then only half would be exempt (first 7 years actual, plus last 36 months - the 10 years 'in the middle' being taxable)

I dont think CGT is an issue for you unless you hold for a longer period of time.

Incidentally, CGT is only paid when the property is sold or gifted (excluding interspouse transfers), not purely on entering a rental business.

Income Tax:

Once you start to let the property out you will need to report in the income and expenses on a self assessment tax return. As you and your wife are joint owners, you will both need to report the figures. Your 'rental year' will run 6/4 to 5/4 next.

You can deduct normal expenditure and mortgage interest (but not the capital element). It is the mortgage interest that in your case will give you a bit more to play with.

As the property is worth £125k 'at introduction to the business' you can claim mortgage interest on capital up to £125k, not just the original purchase. So definately on the £84k mortgage secured, but possibly also more. I posted an explanation of this on another query, however, broadly, you need to establish a connection. I would say that were possible, top your 'buy to let' mortgage up as close to £125k as possible to ensure you get maximum relief.

Incidentally if there is a mismatch in yours and your wifes income (for example you may be higher rate and your wife have no income) and you think you may make a profit on the let, then it may be worth looking as an uneven ownership split, which if is applicable, I can explain further.

Hope this helps. Anything that doesnt make sense, let me know and I will try and clarify.

Any further queries, let me know

Plym 77

[Gerry.B]

Thanks you for taking the time and effort to reply Plym77, i'll have a good read at it now and try and digest it all.