1. Home
  2. UK Finance Discussions
  3. Capital Gains Tax Advice

Capital Gains Tax Advice

Hello All,

Can someone confirm that I have my ideas about this situation correct.

In Sept 1996 My Father In Law inherited a house (built by Mother In laws Father in their back garden) . . . No inheritance tax was payable as it was below the threshold. The In laws have subsequently let the property and the tenant now wishes to purchase the house.

As I understand it they have to pay CGT on the difference between the Sale Price and the valuation when they acquired the house. This gain is reduced by an indexation allowance (acquired prior to 1998), possibly Letting Allowance, any costs associated with the sale, and finally Taper relief at 40%.

The net gain is then split between the two of them and after deducting their AEA the liability for CGT is calculated based on their income liable to income tax (One is a pensioner). at the following scale

10% - Less than £1960 20% _ Total Income Less than top of band (£30500) Not charged at 10% 40% - Above the Basic Rate Limit

Is this roughly right? They are going to see their accountant but I would like them to have a rough idea of what is involved before going.

Cheers

Tony

Reply to
admin
Loading thread data ...

Subsequent to what? Did the in-laws ever live in this house? If not, then there is no Private Residence Relief available and consequently no Letting Relief either.

Indexation allowance for Sept 1996 is 5.7% of the probate valuation.

Maximum 40% taper relief is only available if they sell at least 9 full years after April 1998, so make sure they don't sign any sale agreement before 6/4/2007 or else TR will only be 35%.

Yes, roughly, but the £1960 and £31500 figures relate to 2003-04 and have since been revised upwards somewhat.

This year (2006-07) the 10% band is £2150 wide, but the relevant year will be 2007-08, for which the figure has not yet been announced. It ought to be about £2210.

The 20% band is £33300-£2150=£31150 wide this year, and will perhaps be £34200-£2210=£31950 wide next year.

AEA is £8800 this year and may be £9100 next year.

If there is enough gain left after taper and 2xAEA for half of it to put one of them (but not the other) above the basic rate limit, they could re-distribute the proportion of ownership between themselves (assuming they're married to each other) so as to use up all of both

20% bands before any of the 40%.
Reply to
Ronald Raygun

Yes, except lettings relief is only available if you have lived in the house. Then there would be an exemption as well.

You have the bands wrong also.

Reply to
Peter Saxton

Ok thats a bit of a pain, but probably not that relevant in the long term.

Thanks to both of you for the quick response. I was going off the CGT leaflet on the Inland revenue site I hadn't noticed that it was (well) out of date.

Still it looks as though I'm not completely off the mark

Regards

Tony

Reply to
le Man

What long term? "The tenant now wishes to purchase..." sounds as though you don't have a long term to play with. If you don't make up your mind soon you could lose your ideal buyer, and if the price is right, a tenant buyer is about as good as it gets. No redecorating prior to marketing. No marketing, hence no estate agency fees, though you will want to get an independent valuation done and to engage a conveyancing solicitor.

Should you not sell to the tenant now you could wait till they move out to elsewhere or you could kick them out, make it a second home for yourselves, and nominate it as your PPR, thus knocking a huge hole in your CGT bill (at the expense of knocking a small dent in the 100% PRR for your real home).

The snag with this plan is again that you would first lose your ideal buyer and may not find another buyer easily. There again you could get lucky. But there's all the hassle of redecorating and marketing.

[For "you" read "your in-laws"]
Reply to
Ronald Raygun

HMRC are not very good at removing out of date information. It's one thing to have archives or rates and bands but quite another to just show rates with no indication that they are a few years out of date.

Reply to
Peter Saxton

I have a client who's single and in his 40s and he's shocked at the tax he will have to pay on the flat's he's developed. I've suggested that he develops a flat and then moves in for a few months and then rent the flat out and move into a newly developed flat. If he keeps doing this he should be able to reduce his tax significantly.

Reply to
Peter Saxton

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.