I have a property which my wife and I purchased 7 years ago for 170k, we moved out 2.5 years ago and have been renting the property, it is now worth
450k. If we wish to sell it NOW where do we stand with CGT, and if we decide to sell it in 12 months time where do we stand (I think we are liable for CGT if we don't sell it now)
I have also been told that if we move back and live there for 6 months before we decided to sell it say in 12months then we would not have to pay CGT is this right?
The gain (in your case 450k-170k(0k, but check the figures again, because the overhead expenses of buying and selling are also deducted) is taken to have occurred linearly throughout the period of ownership (i.e. 40k per year) and each year of Principal Private Residence status qualifies for 100% relief, but the last 3 years qualify despite there being no actual PPR status during the last 2.5.
So, if you sold now, the entire 7 years would qualify for PRR and thus there would be no CGT to pay.
If you sold in 1 year's time, then the first 4.5 years and the last 3 would qualify for PRR, and the inbetween half year would qualify for Lettings Relief (which is also 100%) so again there would be no CGT to pay.
If you sold in 2 years' time, there would be some restriction of the LR for the middle 1.5 years because LR is capped at £40k. Your gain would now be 280k in 9 years or 31k per year, and 1.5 years would have almost
47k attributed to them, of which 40k qualifies for LR and so only 7k would be potentially taxable, but this is below your allowances so again no CGT would be due. And that's without even thinking about indexation allowance and taper relief.
Basically: No pressure.
No, this is not correct (except inasmuch as you wouldn't pay CGT anyway if selling in 12 months). Since the last 3 years of ownership already qualify for PRR, there is nothing to be gained by according them actual (as opposed to deemed) PPR status at any time during those 3 years. The actual status at the moment of sale is irrelevant, what matters is the aggregate status throughout the period of ownership.
(1) When calculating possible future CGT, isn't it more prudent to assume a future increase before sale? - Because that would (if anything) increase any potential CGT liability;
(2) If considering "net value after CGT", then wouldn't it be more prudent to assume a *drop* rather than static prices?
Call it a compromise. Another thing I neglected to do, from tact rather than oversight, was to grill James about the tint of his spectacles. Does he *really* believe his property to be worth
450k when it was worth 170k 7 years ago? It does sound a bit on the optimistic side.
No, because prudence isn't about worrying how much CGT you'll pay, but rather about worrying how much (or little) money you'll have left after the tax has been paid (Your "(2)" clearly anticipates this). Relative to any particular predicted pre-tax/post-tax value pair, is it not the case that (keeping the sale date fixed) the function "post-tax proceeds as a function of pre-tax proceeds" is monotonic non-decreasing over any reasonable interval covering the range of likely drops and increases, and that the same is true of the function "CGT payable ans a function of pre-tax proceeds"?
In other words, having predicted a likely pre-tax value and calculated the CGT associated therewith, the thing to say is "if you end up having to pay *more* tax than this, well, then count yourself lucky because it means you'll also have more dosh left in your pocket".
Yes. Though I was being prudent, it would have been possible to be more prudent. But is it wise to be too prudent? We don't want to stray too far from being realistic, otherwise making predictions at all gets a bit pointless.
Is that a compromise in that it just makes it easier to calculate, or becauseyou think it is a realistic/prudent assumption for the next 2 years?
OK, prudent...
"Ronald Raygun" wrote
Not necessarily - you may be solely worried about whether it will be necessary to calculate, and declare&pay, any CGT.
Prudence in that case is worrying solely about the size of any CGT payment, not the proceeds after tax.
"Ronald Raygun" wrote
I was trying to discover whether you thought static prices (over the next two years) are realistic or not.
As you say that your calculation was meant to be prudent (under option '2' above), then your realistic best-guess must be that prices will be higher in two years' time. Is that so?
Not revising the figure was a compromise between revising it upwards and revising it downwards. Between being too optimistic and too prudent.
That seems a pretty daft thing to be worrying about, given that you have in any case to fill out an SA108 (even if no CGT is payable), provided the proceeds themselves exceed the puny threshold of 4 times the annual exempt amount.
My crystal ball has cataracts, so I wouldn't put too much faith in it. I'd say I probably would, yes, but the margin of error is so high that any rise or fall likely to happen is likely to lie within that margin of static.
Well, OK, if you want to press me, I think prices will go up over the next two years, but not by very much.
Let's just say that if we were to trim the edge off his optimistic estimate of present value, and then apply a "reasonable" estimate of future growth to the result, then what we end up with might be roughly back to where he started from, giving an illusion of more or less static prices despite a general background of slightly rising prices.
Thanks gents for the helpful info. the property was quickly going to ruin when we purchased it, and after gutting it (new plaster, some new walls, new windows, all new coverings, loft conversion, new wiring, infact new everything, inc. bathroom and kitchen 150-200k later) and 7 years of growth gives us a house valued at 450k
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