Using Proceeds of Sale on one property to buy share in another property and pay off mortgage

[ritz13]

Hi Guys

I was wondering if anyone can please help with our scenario below

So we are 4 brothers.
2 of us have a mortgage on property 1 and
2 of us have a mortgage on property 2

We are looking to sell off property 1 and then get all our names added to property 2
Our plan is to use the proceeds from sale of property 1 to pay off HALF the mortgage still left remaining on property 2

In effect, the 4 of us will have equally contributed in paying off the mortgage on property 2

We would like to know if the below is the correct way of doing this and if we would be liable to any Capital Gains Tax on Property 2.
(we have worked out that we won't be liable to CGT on property 1 with the use of PRR, Lettings Relief & AIA of 11,700)

1) The 2 of us who have sold the property will add our names to the Land Registry on Property 2
2) We will all register ourselves as "Tenants In Common" on property 2

Any advice will be much appreciated

Thanks

Ritz

[AGoodman]

The thrust of it is that 2 brothers will be selling a 1/2 share in property 2 to the other 2 brothers. So:

CGT - The current owners of property 2 will each be disposing of 1/4 of the property. This is a deemed market value transaction as you are connected. The two owning property 2 will each realise a gain equivalent to 1/4 of the total gain on property 2 (market value vs acquisition value)

SDLT - The "buyers" will be buying a 1/2 share in the property. SDLT is based on consideration, which will be the contribution they are making to the mortgage PLUS a 1/2 share of the remaining mortgage debt that they are taking on (assuming they are in some way taking on a share of the balance of the debt - a mortgage won't allow them a transfer of the property without that). Also bear in mind the additional rate of SDLT for second home owners if either of the "buyers" already has a residential property.

Essentially, if the current mortgage debt on property 2 is £200,000, the "buyers" would be paying consideration of £100,000. SDLT would be charged on that sum.

[ritz13]

Thanks A, that's very useful

So for Property 2, let's say:
The Property was purchased for £220k and it is now valued at £400k
My 2 brothers took out a mortgage for £160k and we now have £80k left to pay
Me and my other brother will pay off the £80k and add our names to this property

Please can you let us know what the CGT liability would be?
I'm guessing that we won't have any Stamp Duty to pay? Or would we, as "in effect" this would be our second home eventhough this property will be our one and only residence once property 1 is sold

Thanks

Ritz

[AGoodman]

If the property is standing at a £180k gain (ignoring deductible transaction costs and any capital improvements, each brother will make a £45k gain. After the exemption that is £33,300 each, subject to CGT at 18/28% depending on their income and any other gains for the year. They may get PPR if they live in it.

If you are just paying £80k (looks slightly odd for the acquisition of half of a £400k property) and you (or your spouses) have other property interests, you would pay 3% or £2,400 SDLT.

[ritz13]

Hi A,

So what happened was with Property 1 - we lived there for a few years and then rented it out the next few years when 2 of my brothers purchased Property 2.

Once Property 2 was purchased me and my brother moved in with them, so we are all living together for the time Property 1 was on rent. We've also contributed towards the cost of property 2 eg. helped pay some of the deposit and monthly rent

Does that mean me and my brother would also receive Private Residence Relief on Property 2 as we've been living there?

Where you say "other property interests" - if we've sold Property 1 and will only be living in Property 2 we would have no other property interests going forward. Would this still mean that we have to pay stamp duty on Property 2?

thanks again ...hopefully that'll be all, you've been extremely helpful!