U.K. Capital Gains Tax and Exemption by Re-Investment?

The first £9200 of capital gains you make in the current tax year are disregarded, yes. You have two personal allowances, one for income tax and one for capital gains, and any part of one which you use does not reduce the amount available for the other. And of course any anount you don't use for one doesn't increase the amount available for the other either.

Unless the govt have changed their mind, it depends on when you sell.

If you sell before 6/4/08, your gain will be £50k minus buying and selling expenses, minus indexation allowance, minus taper relief, minus £9200. What's left will be taxed at 20%, unless you're a higher rate taxpayer in which case it will be at 40%.

If you sell after 5/4/08, your gain will be £50k minus buying and selling expenses, minus £9200 (or probably a little bit more), and no indexation or taper is allowed. What's left will be taxed at 18% irrespective of whether you're a HRTP.

No, there are two allowances, one for income and one for gains. But income and gains, after the allowances have been deducted, are combined in order to determine how much is to be taxed at the higher rate. After 5/4/08 this will be irrelevant as no higher rate will apply to gains.

"I heard it from a guy down the pub". Hehe.

Sorry, this is not the case. There is such a thing as business roll-over relief, which applies when you sell the assets of one businesss to buy assets for another, but residential property does not qualify.

If you've ever lived in the property as your main home (or are prepared to move in temporarily) and you've let the property in the intervening time then you'll probably have enough allowances to avoid paying any CGT at all.

Ronald & Tim... thanks for such great comprehensive replies guys... I was expecting someone to say "duh, Google it" or something. The problem is, even after turning up info from Google and old UseNet posts it still isn't easy for me to understand or interpret for my personal situation I work damned hard for my employer, and am pretty knowledgeable in my field (commercial transportation) but tax issues go right over my head, as I'm PAYE and usually don't need to know all the ins and outs of Capital Gains Tax etc. So now I've thought to myself, why not work damned hard for *myself* instead, and see some more of the returns!

SNIP

SNIP

Well I'm most definitely in the lower rate band for Income Tax, and will be for the some time if I continue my current career path.... hence the move etc. If the same 'bands' apply for Capital Gains Tax then I reckon I'll be paying a fair bit of it at 40%.... maybe a good reason to wait until AFTER 6/4/08... unless the 20% saving in Capital Gains is cancelled- out by this change in indexation allowance and taper relief that you refer to? In fact, can I ask what you mean by the terms 'Indexation Allowance' and 'Taper Relief'? I understand the rest of your explanation but not these terms.

BTW I'm not being *totally* lazy - I've just discovered

Tim Woodall - can I ask how long I would have to live in the property to get relief from Capital Gains... again, 'someone down the pub' LOL told me it was 1 year and that I'd have to produce utility bills in my name for that address as proof. I'm living with an elderly relative at the moment so moving 25 years away for a year isn't really an option... plus I'd like to start my new business venture well before this time next year. Although at this stage it's really just a feasibility study I suppose

- if the answers you guys give me makes it sound semi-workable, then I'll put together a business plan and see an accountant.

In fact, maybe I would be safer speaking to my bank manager, get a business loan (if I can) and set up as a Limited company... sell the property and invest the income elsewhere, rather than risk my own money on a new-startup.

Thanks again to both of you for your help... if you can answer these questions I would appreciate it greatly, and I promise not to make the Q & A a nightly thing LOL. If anyone has any further advice or previous experience with this kind of thing please contact me at johnnybanjoATyahooDOTcom

Cheers, Jay

Yes, they are the same bands. Once you add together your PAYE income and any other income, you will be a certain amount below the threshold at which higher rate tax kicks in. If your gain (after allowances and reliefs and the £9200 exempt amount) is below that amount, it will all be taxed at 20%. If it exceeds that amount, then that amount will be taxed at 20% and the excess at 40%.

Quite so. And there is always the possibility, perhaps, that the proposed change will not be rubber stamped by parliament.

Indexation allowance is a mechanism for adjusting capital gain for the effects of inflation. It was introduced in 1982 (or maybe later, I don't know, but applies to assets acquired from 1982). It was abolished in 1998. Suppose you bought an asset for £10k in 1982 and sold it for £20k 16 years later. There has been a paper gain of £10k, but no real gain because £20k of cash in 1998 wasn't really worth any more than £10k of cash were worth in 1982.

Taper relief replaced indexation allowance from 1998, but for assets held before 1998, indexation allowance still applies for the period up to 1998, and taper relief then applies for the period after 1998. Taper relief works by discounting the taxable gain depending on how long the asset has been owned. For non-business assets (and residential property counts as non-business even if your "business" is to rent it out), the relief is 5% for each complete year the asset has been owned after 5 April 1998, up to a maximum of 40%, except that the first two years don't count (but you get a bonus year for assets held before the new regime was announced, some time in March 1998).

For example: You buy a house for £10k in April 1982 and sell it for £50k in April 2007. Your paper gain is £40k. You get approx £10k indexation allowance in respect of the period up to April 1998, which reduces the taxable gain to £30k. You had nine full years of ownership after April 1998, minus the two which don't count, plus the bonus year. That makes 8 years, so you get a 40% reduction in the taxable gain, to £18k. Then you deduct your annual exempt amount of £9200, and so tax will be calculated on a gain of £8800. If adding £8800 to your other income still has you below the higher rate threshold, you pay CGT of only £1760.

This is rubbish.

Or 25 miles, even.

Not to worry, you wouldn't actually have to live there. May we assume that the house where you live is either rented or belongs to this elderly relative and not to you? If so, you would have nothing to lose in terms of Private Residence Relief in respect of the house you actually live in, if you nominated the house you own as your Principal Private Residence.

You can so nominate it, of course, only if it is capable of being your home. That means you have to kick the tenants out and it has to be furnished, and you really ought actually to visit it and stay overnight occasionally.

The advantage of making it your notional home is that if it has been your "home" for any length of time at all, then the last 3 years of ownership automatically quialify for PPR status too.

Take the gain after indexation but before taper, and call it X. In the above example, X would be £30k. If you have owned the property for N months, then 36/N of X would be your PRR. If you get PRR, you also qualify for Lettings Relief. If the property has been rented out for R months (not counting any of the last 36 months, since they already qualify for PRR), then your LR will be R/N of X, but the figure is capped both at £40k and at the amount of your PRR.

In many cases this boils down to 72/N of your gain being relieved. What's left of the gain is then subject to taper relief and to deduction of the £9200 as normal.

That's not an option. No bank manager is his right mind would lend to a Ltd Co without a personal guarantee from the owner. That means you would be risking your own money in any case.

Don't even think this. Temporary residence does not count and could possibly end up with you paying extra interest and penalties when they enquire into such an obvious attempt to bypass the rules.

If it's your only home (and as I understand it the OP is currently living with his parent, presumably in their home or a rented house) then there is nothing dodgy about this at all provided you actually have it as your home, i.e. don't have tenants, change the bills to your name, furnish the house, pay council tax, and stay there occasionally.

For the OP to stay there one night per week for the next four months or so could easily reduce his CGT bill from 16k to nothing. There is absolutely nothing dodgy about staying in your only or main home for one or two nights per week but living in rented accomodation during the week. Most of the people I've known who have done this have done it to avoid a very long commute but, other than the unnecessary expense, there's no reason why you couldn't rent the house next door to sleep in most of the time and only use and visit your main home at the weekend.

If you own more than one house that you use as your home you can nominate which is your principle private residence. HMRC doesn't require that you nominate the house that you spend most of your time at (but does require that you make the nomination within two years of buying the second property).

Tim.

Yes I do live with my elderly mother (and the house is registered in

The property which I'm proposing to sell is in *my*name but has been derelict for a couple of years, so there have been no tenants, bills etc. Although the last bills received to the house would have been in the name of the guy who I used to let it to, before he claimed squatter's rights and basically trashed the place. If I installed a basic bathroom, kitchen and a bit of secondhand furniture... could I claim that as my only residence and possible avoid a big CGT bill whenever the property is sold?

It is the only property registered in my name, although I would have no bills in my name and I'd have to get the utilities turned on again... if I thought I could do this in a month I'd be a very happy camper, but the bloke down the pub's figure of 1 year minimum is completely unworkable.

Thanks again everyone for the helpful answers, Jay

I don't think it is within 2 years of buying the property. AIUI it is within 2 years of any change occuring to the set of properties you own which could be eligible for nomination as a PPR.

Buying the property you wish to nominate is only one way of effecting such a change. Buying *or selling* a *different* property is another. Yet another, I suggest, is changing the status of a property you already own (even if you've owned it for many years) from being ineligible for nomination (because it is let or uninhabitable) to being eligible (by the letting ceasing or by becoming habitable), or from being eligible to being ineligible (such as by letting it).

One year minimum is not correct. There is no minimum. In theory at least one day is sufficient but you have to be able to convince the tax office that it really was your only or main home for part of the time.

The fact that the property has been empty and unlet might change the calculation somewhat depending on how long it's been empty.

I think you get the following:

N months of residential lettings where N is the number of months it was let (including voids between lettings while it was being marketed?

- I think) but not including any months that overlap with those last

Next calculate your CGT allowances for each of these. If you've owned the house for M months then you'll get:

So if you've made 50K gain, owned the house for 114 months, let it for

50k*36/120 = 15K PPR

So you will pay CGT on 50-39k (or about 4.4k@40%, 2k@18%)

If you don't move in then you will pay CGT on 41k (about 16.4k@40%,

(There's no guarantee that the 18% tax band will actually happen)

One other possibility would be to give a chunk of the house to your mother now to use up this years CGT allowance and then to jointly sell the house next year so you get a second chunk of 9k. This has a lot of potential complications with effects on your mothers assets, problems if she dies etc. You'll definitely need expert advice if you want to think about going along this route and, assuming the 18% CGT tax band does come in it will save you a maximum of 1656GBP and you'll probably need to spend a good chunk of that on the expert advice. It's probably simpler if your mother can afford to buy a chunk of the property from you to use up your 9k allowance this year - I suspect that you could sell 20% of the property to her now and then buy it back in the next tax year to soak up this years 9k before you then selling the house.

(I am not a tax expert - all of the above might be wrong or even illegal!)

Tim.

You've made a typo. The 40k in your second line should be 50k.

First I thought you had capped the gain at 40k and then applied the 84/120 to it, which would have been wrong, but since you got the right result of 35k, you must have calculated it correctly based on 50k*84/120. The 35k result is then capped at both 40k (irrelevant here) and 15k.

You're right. I did the calculation in my head (0.3*50, 50-155 and as a cross check 0.7*50) - I deliberately set the current ownership at

Tim.

But they will probably elect to have the main residence for PPR. To quote HMRC guidance:

"If you have another dwelling-house eligible for relief, for example a house or flat which you bought or rented as your home while absent, you will need to make a nomination in favour of the original dwelling house,"

If it is your only property you own, and not just the only property in your name, then I assume it was nominated as your Personal Residence even though you chose to live elsewhere. It does not simply become your private residence if you have others and you just spend a few days living in it. Be very careful, people do get caught out this way.

CG65051 - Private residence relief: residence before/after period of absence

The legislation does not specify how long the period of residence must be. CG64441 explains that it is quality of occupation rather than length of occupation which determines whether a dwelling house is its owners residence. Similar considerations apply here. It is not possible to set a minimum period of occupation which will be enough to allow relief for a period of absence. Both before and after the period of absence the dwelling house must be its owners home and not merely occupied for a temporary purpose.

The OP is now attempting to have the house recognized as his PPR going forwards. "The final 36 months of your period of ownership always qualify for relief, regardless of how you use the property in that time, as long as the dwelling-house has been your only or main residence at some point". And if he can establish that requirement he also becomes eligible to lettings relief.

If you see

As the OP probably has no interest in the property he is currently living in, restoring his own property to a habitable condition and using it as his home, even if he only stays there occasionally, should be sufficient to establish his right to private residential relief. Depending on whether he has a tenancy agreement or whether he just "lives with his mother" will determine whether he needs to nominate his house as his main residence when he first uses it as a residence or whether it will happen by default.

Also, CG64488 says: "If the individual has more than one residence the relative extent to which each is occupied as a residence is not a material factor." so even if he does have a tenancy agreement it won't matter if he just stays in his house for one day a week.

Tim.