CGT question

Hi all Can anyone give an informed opinion of taxable asset disposal and the new CGT tax proposal.

My wife holds a lease jointly with her sister on a 1 bed flat, purchased 1998 for £22,000, (at professional valuation) which has been rented out ever since. Only expense was extension of lease life span during 2005 at cost £3000 which was claimed as business expense on last tax return. Other running expenses over the years have been accounted for with the 10% of profits tax arrangement. Sisters have shared profits throughout, 50/50.

My wife now wishes to sell her half share for £50,000 (professional valuation) to her sister. It could be within the next few weeks or after the budget 2008

My wife is a standard rate taxpayer but may become redundant and retired Jan 2008(if that changes anything), she will have no other capital gains for the year 2007/2008.

Which is the better way to go, now with the old taper or later 18%?.

Separately, what if my wife only sold her sister half of her 50% share in the flat immediately and the other half in the tax year

2008/2009. Obviously I'm thinking of her being able to use her two separate years cg tax allowances, there is no prospect of her having other capital gain this side of the pearly gates. Thanks in advance.
Reply to
johnw
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OK, let me assume the £22k was for the whole lease, so your wife's gain if she sells her half for £50k is basically going to be £39k. Some small deductions can come off that, being the incidental expenses of both acquisition and disposal (survey and legal fees, that sort of thing). Call the adjusted gain £37k. Since acquisition was in 1998, indexation won't apply anyway, (unless it was before 6th April, but even then it'll be negligibly small, but at least there could be a bonus year for taper).

If she ceases earning in January, this simply means her taxable income will be some 25% less than it would otherwise have been, and the only effect is that more of her gain would be taxed at the 20% rate and less at the 40% rate if she sells during 2007/08. Let's say for the sake of the exercise that her taxable income for the current year is £15k short of the higher rate threshold.

Let's also assume *you* have no capital gains either.

Well, for taper purposes she will have 8, 9 or 10 full years of ownership. If she bought in November 1998 and sells in October 2007 it would be 8 years, if she bought in Feb 98 and sells in Mar 08 it would be 10. If she bought in Feb 98 and sells in Jan 08 it would be 9 but she'd get a bonus year. Let's suppose she has 9 years, then taper relief would be

35%, bringing the taxable gain down from £37k to £24k. Take off the annual exempt amount of £9200 and that's down to £15k. Since (by my above assumption that she is £15k short of higher rate threshold, she would pay CGT at 20% of this: £3k.

If she sells after 05/04/08, The whole £37k gain (minus £9.2k AEA) would be taxed at a straight 18%: £5k.

She would realise half the tapered gain this year (£12k). Take off £9200 and tax at 20%: £560. And half the untapered gain next year: (£18.5k). Take off £9.2k and tax at 18%: £1670. Total tax therefore £2230.

Of course she could gift half her share to you first, and then you could both sell your quarter shares to her sister, utilising two cg allowances

*this* year. You would each pay £560 this year, unless you're a higher rate taxpayer, in which case you'd pay twice as much. Total £1680.

Or she could gift half her share to you, and then you could each sell

*half* your quarter shares this year and the rest next year. You would each be realising only £6k of gains this year, which is below the AEA, so no tax payable. Next year you would each realise £9.25k gain, which by them will also be below the AEA: Total payable: £Nil.
Reply to
Ronald Raygun

That's capital expenditure.

accounted for with the 10% of profits tax arrangement.

What "10% of profits tax arrangement."?

You can claim wear and tear allowance of 10% of the gross rents received less any council tax and water rates.

Peter

Reply to
Peter Saxton

That's what I thought too.

Can you claim this for an unfurnished property? As far as I can work out from the IR site, this only applies to furnished lettings.

Tim.

Reply to
google

Me too, but I was afraid to say so in case it was wrong and I was going to get my head bitten off. I suppose this means she ought to inform the taxman that she has made a mistake on her tax return, and will have to pay the back-tax owed plus any interest.

If this expenditure was incurred "during 2005" and if it was after

5th April, then the 2005-06 tax return is the one affected, and tax would have been due by the end of January 2007, so there *will* be interest to pay, and possibly a £100 penalty, which might be waived given that notification of the mistake was volunteered.

On the other hand, an alternative (which is probably strictly speaking illegal but morally acceptable) is to carry the error forward and to pretend there is an additional £3000 of rental profit during 2006-07.

The up-side is that the £3000 comes off the capital gain, and if any of the gain were to happen to be taxed at the higher rate, she could save 40% tax on up to the tapered gain. This means she could save more tax by setting it against gain than against the rental income.

That's correct. The purpose of the WTA is to simplify the accounting for repair/renewals of contents. If you claim the WTA, you cannot claim for costs of actual repairs or replacements to any contents other than fixtures and fittings.

Reply to
Ronald Raygun

Ferris only tries to bite your head off if you are right. He'll then change the subject, throw a few insults and disappear - probably to his mcdonald's shift.

Reply to
PeterSaxton

-Many thanks Mr Raygun for you're advice re CGT, it looks a good way to go to avoid un-necessary taxation. I have asked my solicitor to action the paperwork along the lines of your suggestion. Much gratitude. JW

Reply to
johnw

John's not interested in corrections - just not paying tax!

Peter

Reply to
PeterSaxton

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