Capital Gains question

We bought a 1 bed flat in Dec'02 for 147,500 with a 120,240 mortgage (BTL interest only) Our Son has been living there for about 1 year now, and wish's to buy it from us. It has been valued at 180,000 we said we would pay his 5% deposit on the flat. What is our capital gains liabilty??

We rented the flat from Dec'02 June'03 making about 100 pm. Our Son just covers the mortgage currently at about 550pm

Kind regards

James

Reply to
James Mawson
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[wishes]

What do you mean by "pay the deposit"? Are you giving him a 5% discount, so that you're really selling it to him for £171k, or are you making him a cash gift of £9k which he will use in part payment of the £180k purchase price? Not that it matters either way. Given that you are selling to a "connected person", the actual price will be disregarded for CGT purposes, and the market value substituted. This is likely to equal the valuation, unless the valuer used an upwards bias. Note that the difference between the sale price you agree, and the market value obtained by an unbiased market valuation will not only affect the CGT position but will also have potential IHT implications.

So on the face of it, your gain is £180k - £147k5 = £32k5. It has never been your home, so you are ineligible for PRR and for LR. It was not acquired before April 1998 so you are ineligible for IA and you don't qualify for a TR bonus year. You haven't owned it for two whole years, so you don't get any TR at all.

You refer to yourself in what I presume not to be a royal "we", so I guess you are his parents and own the flat 50-50. In that case each of you has a £8200 allowance against a gain of £16250, so each of you has a taxable gain of £8050. If you are both standard rate taxpayers, you will have to pay tax of £3542 between you. If your tax bands differ, it may be worth transferring beneficial interest in part to the lower rate taxpayer (if you are married (to each other)).

So you will have declared rental business profits of about £400 on your 2002/03 tax return and of about £300 for 2003/04, won't you?

Fair enough, no more profit after the "proper" tenant(s) moved out and was/were replaced by your son.

One has to ask what your motivation is here. You've made a whopping

30-odd grand in a year and a half and want to cash in at the expense of your misguided son, who will end up penniless and destitute when the market collapses. Not very nice. Better to sell to a stranger. Or you want to give your son the opportunity to "get a foot on the housing ladder" more easily than he could by seeking a purchase on the open market. Sounds better, but if the market turns, he'll still lose a packet. Perhaps you're assuming the market will just keep on rising. In that case, be aware that by fiddling the price or biasing the valuation, however much you minimise your CGT bill, you may unwittingly be maximising his (in due course). That may not matter if it remains his home throughout, but he might get fed up and rent it out when he shacks up with some millionaire's daughter who'll chuck him out on the street when she dumps him.
Reply to
Ronald Raygun

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