Probably a pretty basic question on property CGT

by **JasmineR** on Fri Sep 30, 2011 10:15 am

My husband and I have a property we currently live in and are planning to rent out with a buy-to-let morgage.

The property cost us 213K in 2006 and we have lived in it since. It is worth 250K now and we have ~150K left on the mortgage (which will become the buy to let mortgage amount), so there is 100K equity in the house.

My first question is this: If we sell this property in future (greater than 3 years time) for say 300K, on what amount would capital gains tax be charged?

I can't seem to work out how the purchase value, current value, current equity in the property and final sale value are related to give the amount that the capital gains tax would be charged on.

My second question: We will initially be paying the mortgage on an interest only basis, but eventually we may switch this to a repayment mortgage, or a series of one-off payments to reduce the capital owned. How will this affect the amount determined in the first question?

My third question: Does the equity built in the property during the let period get treated differently to that before the let period begins?

Thank you in advance for your advice.

by **section 44** on Fri Sep 30, 2011 10:36 am

JasmineR wrote:My first question is this: If we sell this property in future (greater than 3 years time) for say 300K, on what amount would capital gains tax be charged?

Your gain would be broadly £85k. The tax due would depend on how much relief is available - that would depend on how far in the fure the property is sold.

JasmineR wrote:My second question: We will initially be paying the mortgage on an interest only basis, but eventually we may switch this to a repayment mortgage, or a series of one-off payments to reduce the capital owned. How will this affect the amount determined in the first question?

The mortgage will have no bearing on how much tax you pay on any gain.

JasmineR wrote:My third question: Does the equity built in the property during the let period get treated differently to that before the let period begins?

No. In equity you presumably own all of the property, albeit that you owe money to the bank which is secured on the property.

by **JasmineR** on Fri Sep 30, 2011 3:31 pm

Thanks for that.

I hadn't realised it's as simple as "CGT is due on is final sale price less initial price"!

Much appreciated
Jas

by **Incredulum** on Fri Sep 30, 2011 3:49 pm

JasmineR wrote:Thanks for that.

I hadn't realised it's as simple as "CGT is due on is final sale price less initial price"!

Much appreciated
Jas

It isn't. "CGT is due on final sale price less initial price less reliefs," is correct.

You will be entitled to considerable reliefs in respect of the years in which you lived there, the final three years and up to 40k of lettings relief (each if you both owned it before you move out) and 10k annual allowance (each if jointly owned). I doubt tax would be due in the event of sale within the next decade.

by **JasmineR** on Fri Sep 30, 2011 6:44 pm

Now that is interesting...!

The house is currently owned by my husband 100%. We were planning to to a transfer of equity to make it 50:50, at the same time that as we remortgaged to a buy-to-let mortgage.

Is it beneficial to do the transfer of equity before doing the remortgage, to take advantage of any tax breaks we could each have individually?

Thanks

by **Incredulum** on Mon Oct 03, 2011 10:09 am

It's not the remortgage that is important. The transfer of equity should be done as soon as possible. Ideally before any decision is made to move out of the property, though it is obviously too late for that. Certainly before you move out.

by **JasmineR** on Thu Oct 06, 2011 10:32 am

It looks like we won't be able to do the transfer of equity before we move out (after speaking to a lawyer dealing with the remortgage and the bank that currently holds the morgage). It's not really that we can't just that it will be expensive and delay the moving process.

Instead we'll be having a transfer at the time we do the re-mortgage.

So, what's the affect of this? Are there any detrimental (taxation) impacts of doing this transfer at the same time?

Thanks

by **Incredulum** on Thu Oct 06, 2011 12:27 pm

Sack your solicitor and get a new one.

Failure to transfer the equity before moving out could cost you as much as 15k in tax (40k letting relief +10k AE @28%). Although to be fair with the values you mention it would be possible to transfer it back to your spouse prior to eventual sale and no tax cost would arise.

Your solicitor can draw up a declaration of trust in ten minutes (and will charge you £200 for it, but that's by the by) which will achieve what you want to do. Or sack him and employ somebody with a brain.