I bought a flat ~10 years ago and use it as my main home. I would now like to move to a larger house and am considering renting out the flat (as now is not a good time to sell). If I decide to sell the flat in a few years time, would the capital gain for tax purposes be:
a) sale price - purchase price
b) sale price - value when I moved out
c) something else?
In other words by renting out the property do I loose the tax free status of the capital gain I have already made on my main home?
In a nutshell, the taxable gain would be calculated as at (a), deducting the incidental costs of both sale and purchase. A correction is then applied to take account of the time it was your main home. This is done by dividing this total gain by the total number of months you've owned the property, and multiplying by the number of months it was not your main home.
A further relief is available under the so-called 36-month rule. Provided the property has at any time during your ownership been your main home, then the last 3 years of ownership will be treated as if it was your main home during them, even if it wasn't. In addition to that, you can also get Lettings Relief for up to another 3 years. The upshot of this is that in most cases you can rent the place out for up to 6 years without any of the gain being taxable.
Relax. With a bit of luck, even if you rent it out for 15 years, there may not be any gain at the end to tax. :-)
That's not how I though lettings relief worked. I thought you did the following:
Calculate gain.
Apportion the gain to PPR and non PPR based on number of months you've lived there plus 36 over total number of months you've owned it.
Take the minimum of the gain for PPR, the gain for nonPPR and 40000.
subtract the number in 3 from the nonPPR gain. This is the taxable portion of your gain.
Have I got this wrong (or has it changed?)
I've been toying with the idea of crystalizing my gains by transferring (most) of my propety to my partner. How long would she have to hold it before potentially transferring back for this to count[1]? By doing that we can ensure that there is no CGT until it returns to its current value.
Tim.
[1] We'd probably do this via a sale rather than a gift to avoid problems with death duties on gifts.
This surely would be fraud. It's the sort of thing you could get away with - there must be all kinds of very good reasons for selling and gifting properties between partners - but "avoidance of tax" is not one of them. Posting your intention on usenet rather puts the hat on it.
Two hits of legal fees & stamp duty up front. The possibility your partner might walk away if there is anything in it for her - a gift is a gift, consideration on a purchase is just that. Large amounts of money swishing backwards and forwards with each transaction being reported by the bank to HMRC, and by HMRC to the District Valuer...
To answer your earlier question: "At least one complete tax year" :)
I don't understand why it would be fraud if the house was sold. If we were married and we were selling I could give her half the house and then we could both claim the 9k CGT allowance.
I can see why gifting it backwards and forwards might be dodgy but even then I'd have to pay any CGT on the gift because we're not married, and likewise on the way back.
I'd say posting my intention on usenet was a good thing. If it is fraud as opposed to tax avoidance then I'd rather find that out before I do anything rather than afterwards. I'd rather find out before paying a solicitor to tell me I can't do it.
No stamp duty, it's below the threshold. Sure, she could take the house and run, or I could take the money and run. I've got no problem with the transactions being reported or the district valuer getting involved, there's no intention to do anything other than crystalize any gains at the house's current value.
She already owns 1% so it really shouldn't be a big deal to transfer another 98% to her.
OK, well it's probably not worth it then. I was hoping it was one month or something around 5th April would be sufficient.
You get PRR for each month of ownership in which there is either actual or implied PPR use. If there is any actual-use PRR, then each of the last 36 months qualifies for implied PPR use too. (This just means that if there has been no actual PPR use ever, because the property has always been either exclusively for letting or for something like holiday use, then there will be no PRR.)
Any month which does not qualify for (actual or implied) PRR may qualify for LR if the property was let during that month. But the total LR is capped at the lower of 40k of gain and the actual amount of PRR.
Generally this means that if the 40k cap can be ignored, then at least 6 years of letting will qualify for relief where actual PPR use has been minimal and it all predated the letting.
But if actual PPR use was substantial, and period of ownership was also substantial, then it's possible that in effect more than 6 letting years qualify for relief.
And if the gain was very large, so that the 40k cap comes into play, then of course it may be that less than 6 years will qualify.
There is no minimum qualifying period. Quality, not quantity, of ownership is what counts. If *she* does not occupy the property as her PPR during her period of ownership, it won't count at all.
How could you ensure that? If you transfer the property to anyone, be it your partner or not, you will crystallise the gain and will become immediately liable for CGT. The only circumstance in which this would not be the case is if the transferee is more than just your partner, namely your spouse (or spouse-equivalent formal legal "civil partner").
Looking at the long term house price graph (which I can't find right now) it looks like the period of the boom-bust cycle is about 15 years. Obviously, this is no guarantee that it will be the same again.
On Feb 23, 4:24 pm, Troy Steadman wrote: > > I've been toying with the idea of crystalizing my gains by transferring
For married couples, tax avoidance is a very good reason to gift assets between them. Tax avoidance is not tax evasion (which is illegal).
If you are not married you need to consider inheritence tax if you gift assets back and forth. All the gifts you make in the last 7 years of your life get added in to your estate. So, if you pass an asset back and forth it gets added to you estate each time AFAIK.
Thanks. I've paid unnecessary tax before because of not understanding the rules (thousands of pounds, probably more than ten thousand. Too long ago to reclaim even if you are allowed to redo old accounts in a more tax favourable way) so I now try to keep track of where my tax liabilities might fall in the future.
Isn't there bed an breakfasting provisions on house sales? There's no intention for this to ever be her (or mine again) PPR.
But that's the point. Had property prices continued increasing at the rate that they have without the recent falls then I estimate I'd start "owing" CGT around about now. Even with my best guess as to it's current value I think I'll be using up some of my CGT allowance if I dispose of the property. If I transfer it to her now I can use up all my reliefs and reset the clock. As I anticipate there will be a further substantial drop in value and it could well be 10+ years before it returns to its current value that would mean that there would be no CGT due until that point.[1]
If I don't do the transfer then if it returns to its current value in
10 years time then I estimate I'll have a taxable gain of about 23000 due to the PPR portion of the relief falling to about 30% from about 50% now.
If I gift it to her to crystallize gains and then at some later date she gifts it back to me (It makes sense for us to try and ensure that any realized CGT losses if we were to sell up are in my name as I'm more likely to have other gains to offset against them) then if I die then my gift to her is going to incur IHT even though she's already given it back to me. i.e. It will incur IHT twice.
If we buy/sell then our net assets for IHT don't change and if I die the IHT charge won't vary.
Tim.
[1] You could argue that if that's my view then I should sell now and buy again later. But I'm happy with the house. It has, so far, proved very easy to let (that could mean we're not asking enough rent I suppose) and, as far as money invested it's actually the smallest part of my "balanced" portfolio of cash, stocks, bonds, and propery and if inflation does really take off it's likely to be my safest investment.
Ah, but is the housing cycle relevant? By "this crash" I was referring to the credit one, not the housing one. Don't you think the downturn effect of the credit crash will be not only longer-lived than a housing cycle downturn, but also so large that it will swallow up the upturn from any housing crash which may or may not be going on at the same time as it?
Why the hell not? Saving money is always a good reason for anything.
Well yes I suppose it would do, if Mr Woodall were posting using his real name, which he might indeed be doing, *AND* he were actually proposing to do something unlawful, which he is not.
Legal fees and stamp duty can be avoided by transferring only the beneficial interest and not full title. Thus the transfer need not be recorded at Land Registry, but it should nevertheless be formally documented. This could be done by writing a letter to HMRC.
True. A good reason for selling rather than gifting.
Money swishing backwards and forwards can be avoided by going for a loan agreement. Tim could lend his partner the money with which she would then buy the property off him. By arranging for the loan and sale to happen simultaneously, the money can "change hands" only on paper without even needing to exist physically. She would nevertheless owe him the money while she owns his property, until such time as she sells it back to him, for consideration which will involve "repaying" the loan.
Don't you mean "at least one complete tax day"? If you can "bed and breakfast" shares in a day to realise a gain, then why not a house?
You've miscorrected me. I really did mean "Yes you have got it wrong", though admittedly not very wrong. What you got wrong in this:
was the bit in (3). Here "the gain for nonPPR" should read "the gain for letting". Notice that in general there can be a period of nonPPR use during which there is no letting, therefore "nonPPR" and "letting" are not always the same (though they can be, and perhaps in your case they are). Also the letting part should not overlap the last 36 months, i.e. you don't get double relief for months during which the property is let and which happen to lie in the last 3 years of ownership.
Understood. Unfortunately any plans you make can fall foul of future changes in the rules. :-( There has been one such change recently, namely the abolition of taper relief.
I would have thought so.
Oh, I hadn't appreciated that. In that case disregard the remarks about occupation.
But instead you have another problem. If you transfer the property now, then that ends your period of ownership. The "36 months" will be the 36 months ending now. Irrespective of whether the property then remains in her ownership or she transfers it back to you, any *future* gains (if there are any, and there might not be if you time things right) will be fully chargeable and cannot benefit from any PRR (nor therefore any LR) unless you briefly move into it before you sell.
If you transfer, even if only for a day, she will need to declare (and you to deduct) a proportion of the rental profit income.
There is also a 60-70 year super cycle, and we are heading towards the bottom of that one as well. I don't have an opinion as to how long it will take to get to the bottom of it.
Thanks. Yes, it's working the way I thought it did even if I'm not very good at expressing it.
AIUI, voids between lettings still count as lettings where the house is still a let property. I'd have to dig though records to be sure but I'd guess my total voids amount to about 6 months in 10 years.
Agreed.
Yes. My gut feeling is that it's going to be a long time before it's back to its current value. By crystalizing gains now I can effectively eliminate any tax change issues until it's back to its current value (unless they are very significant changes). Eliminating RLR would leave me exposed to a large tax bill right now.
That's not so much of an issue anyway. We already apportion the income in different proportions to our ownership. IIUC any change in ownership or proportions would require (re)informing HMRC anyway otherwise it would automatically revert to proportions matching our ownership of the property.
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