Help with working out CGT!

[JOHNRE]

Hello, would very much appreciate help with working out a potential CGT liability.

My wife bought a flat in 2014 for £242K. For two years, our son lived there and, from 2016, we have been renting it out. (it has never been our main residence so there is no PPR or Letting Relief). In about a year’s time the son will go back to live there permanently, as his main residence, until we sell, probably in 2021. The flat is currently worth £280K and, let’s assume that it is worth £320K in 2021..

To mitigate CGT, should my wife be transferring 50% of the ownership of the flat to me (at some point) so I can use my annual CGT allowance in 2021?

If she did this next year, should we both then gift the son 50% of our half shares? Would this mean he could claim PPR relief from 2018-2021 as well as his own personal CGT allowance at the point of sale?

We are aware of the IHT implications of gifting him 50% ownership of the flat but I am finding it very difficult trying to work out what CGT will be payable if we sell the flat in 2021.

Any help with working out the figures would be most appreciated!

John

[maths]

As you and your wife will not live in the property you each will of course have a CGT liability on any eventual sale.

If you son owns 50% from the date he moves in then on sale he will be able to claim private residence relief on any gain attributable to his share.

The gift you and wife make to your son will also precipitate a CGT charge at that time (transfers between you and wife will not precipitate a CGT charge).

[JOHNRE]

Many thanks for your reply, Maths.

Para 1 - fully understood.
Para 2 - am I correct to assume that the son's CGT lisbility would be based on the 2014 value of tge apartment (ie £242K) NOT the value at the time of gifting?
Para 3 - I must admit, I don't really understand what you have written here? Could you give me a 'worked out" example of what the CGT charge would be?

[JOHNRE]

Also, Maths (re Para 3).....what scope, if any, is there to offset the purchase, legal, stamp duty costs etc against CGT when we both make the gift to our son? Many thanks for your help. John.

[maths]

Para 2 - am I correct to assume that the son's CGT lisbility would be based on the 2014 value of tge apartment (ie £242K) NOT the value at the time of gifting?

No. Son's base cost for CGT will be the market value of his share at the date of the gift to him.

Para 3 - I must admit, I don't really understand what you have written here? Could you give me a 'worked out" example of what the CGT charge would be?

Assume 242k when purchased by wife. Wife gifts 50% to you. No CGT charge on her part. You acquire the 50% at 121k.
You and wife then gift one half of each of your 50% interests to son when property worth 280k.
The gift by each of you to son gives rise to a CGT charge on each of you.
Wife gifts half of her 50%; her 50% was worth 121k when she bought it and now is worth 140k. Therefore her base cost is 60.5k of gift to son now worth 70k. She has a CGT charge based on gain of 9.5k (which is less than her exempt amount and so no actual CGT charge).
Same for you.

what scope, if any, is there to offset the purchase, legal, stamp duty costs etc against CGT when we both make the gift to our son?

Such costs can be offset suitably pro-rated.

[JOHNRE]

Excellent advice, many thanks!

One final query (promise!) - if we want to offset the purchase costs, will it be 50% of the costs, beacause we will be gifting 50% of the ownership of the apartment? Also, given that the costs were all borne by my wife at the original time of purpose, is it only her that can claim them?

John

[JOHNRE]

Thinking ahead, if we don't have a CGT liability in 2019, because the gain will be less than our annual allowances, would we be able to hold back offsetting the purchase (and also sale) costs until we all finally sell up in 2023?

[maths]

On an inter-spouse transfer it is assumed that neither a gain nor loss accrues to the transferor spouse.

So if 50% of wife's beneficial interest is gifted to you then to ensure she makes neither gain nor loss given purchase cost 242k and, say, incidental costs of 48k she would be treated as transferring 50% for 121k plus 24k ie 145k. Hence your base cost of your 50% is 145k (and wife's 50% she keeps is also 145k including costs).

In effect you benefit from costs even though she paid them originally.

[JOHNRE]

Given that any CGT liability in 2019 would be below our annual allowances, I had been assuming that the costs of purchasing and sale would be used in 2021 to offset against CGT when we finally sell the flat, or have I lost the thread of what you are saying, Maths?

I am not really following how these costs can be seen as part of the value of the property at the point when my wife gifts 50% of the property to me? Sorry!

[maths]

The key is as mentioned in my last post:
"On an inter-spouse transfer it is assumed that neither a gain nor loss accrues to the transferor spouse."

Thus to produce this result on any transfer from wife to you requires that incidental costs she incurred are taken into account on transfer to you.