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Where Taxpayers and Advisers Meet

CGT calculation help on ex-residence --> now let property

adk
Posts:19
Joined:Wed Aug 06, 2008 3:34 pm

Postby adk » Tue Jul 25, 2006 2:15 am

Dear All,

I bought my first home in Spring 1996 for £44k. I lived in it for 5.5 years until Autumn 2001, when I moved to Germany as an ex-pat for my work. The market value of the house at that time was £90k, and I started letting the property in December 2001.

I returned to the UK in February 2004 and because my family had outgrown that first home, we did not move back in. Instead we bought a second property in the May 2004, and continued to let the first home.

I am in position now to either sell or continue to let that first home. It's current market value is £135k.

My question is, what figures do I use for the CGT calculation. Do I use the original purchase price of £44k, or the value when it was first let i.e. £90k, or maybe even the value of the property at the end of taper relief?

If I were to sell the property now, my understanding is that the CGT calculation would go something like this:
Period owned = 10.25
Period resided + Taper relief = 5.5 + 3 = 8.5
Taxable Gain = 135k - 44k (?) = £91k

Calculation: (10.25-8.5)/10.25 x 91k = £15.5k

Furthermore, my understanding is that as this falls below the £40k threshold, no CGT would be payable. Is my understanding correct?

Obviously with such a significant amount of Taxable Gain coupled with the diminishing effect of the Taper relief, I am concerned about crossing the threshold, and suddenly seeing the equity I've built up in my first home suddenly disappearing in CGT.

This concern is impacting the decision whether to sell now or continue to let. Indeed I have a prospective tenant currently waiting on my decision and so any input you can give is sincerely appreciated,

Best regards,

Andy.

al_eebee
Posts:899
Joined:Wed Aug 06, 2008 3:40 pm

Postby al_eebee » Tue Jul 25, 2006 2:38 am

Use the cost of the property - £44k.

You are possibly confusing the value when first with the maximum borrowings on which you could obtain interest relief against the property. That IS the value when first let.

The +3 years is not taper relief but an addition to the number of years that the property is treated as your main residence and exempt under CGT rules.

You will be due indexation relief for the period from purchase to April 1998 which will add between 6 & 8% to the original cost - depends when you acquired the property.

Subject to that the portion of the gain not otherwise exempt is £15.5k as you note and this is covered by the lesser of £40k and PPR relief (£91k - £15.5k), so a disposal on these figures should be fully exempt.

If there were any chargeable gain remaining you would then apply any uused losses brought forwards, and then the CGT taper relief and would still have your annual CGT exemption (assuming not used elsewhere) to further reduce any charge.

adk
Posts:19
Joined:Wed Aug 06, 2008 3:34 pm

Postby adk » Tue Jul 25, 2006 2:58 am

Thank you for responding al_eebee. :)

I was not aware of indexation relief. I acquired the property in March 1996. What do you mean by, 'adding to the original cost'?

Could you expand a little more on your last paragraph? What I'm seeking to do is to approximately work out how many years I can continue to let the property, and have little or no chargeable gain.

What would qualify as unused losses brought forward - I suspect property improvements that do not qualify as property maintenance? Any others? How would I calculate any additional taper relief? I'm a top rate tax payer - what would my annual CGT exemption be?

Apologies for the flood of questions. I just want to be able to go into another tenancy agreement with my eyes wide open.

Kind regards,

Andy.

al_eebee
Posts:899
Joined:Wed Aug 06, 2008 3:40 pm

Postby al_eebee » Tue Jul 25, 2006 4:13 am

Indexation was an allowance for inflation available up to April 1998 when the new system of taper relief was introduced.

It was calculated on the RPI movement month by month and the relief due from early 1996 to April 1997 is about 7%. So your £44k base cost becomes £47,080 (ie £44k + 7% x £44k)

Then you have Taper relief. This is calculated by reference to (in your case) the number of complete years after 5/4/98 plus 1 to a maximum of 10 years so after 5 April 2007 you will have achieved the maximum years and only 60% of the gain will be chargeable.

The taper relief reduction is applied to the net gain after deducting CGT losses unused from previous years. By that I mean losses on chargeable disposals of shares or other property, not property improvements. If you have none then you would be looking at 60% of any net chargeable gain being taxable on a disposal after 5 April 2007.

At present there is no chargeable gain as exemptions are available to cover the gain as it stands at present.

If you have improvement costs to the property and these have not already been claimed against income they may well be available as a deduction from proceeds in the original CGT calculation before considering exemptions and taper relief.

The annual CGT exemption for the current year is £8,800 which will come off any chargeable gain after all other reliefs. If the house is jointly owned then the gain will be split between owners in their owning shares and each will have their annual exemption available (subject to it not already having been used against other gains in the year). So two of you owing the property equally and with no other gains in the year would have an annual exemption of £17,600 available.

How many years you can continue to let the property before a chargeable gain arises will of course depend upon house price inflation as well as the exemptions. Were prices to run away you could become chargeable quite quickly.

Finally for CGT purposes if you were to move back to the original property and use it as your main residence for a period in the future a further three years deemed occupation as private residence would be available to you under current rules. However it may not be feasible for you to achieve this.

Were you to keep the property and continue letting it, AND you do not have a mortgage on it (or any mortgage is less than the £90k value when you first let it), AND you require a further mortgage for your new house then it should be possible to arrange for interest paid on loans of up to £90k in total to be available for relief against letting income.

adk
Posts:19
Joined:Wed Aug 06, 2008 3:34 pm

Postby adk » Tue Jul 25, 2006 4:59 am

Thank you al_eebee,

for the detailed response.

If I have understood correctly, then would the following calculation be about right:

Say I dispose of the property in 5 years time - July 2011, so I now qualify for maximum 60% taper relief. Furthermore, let's anticipate the market value at that time is £200k.

Period owned = 15.25
Period resided + 3 = 5.5 + 3 = 8.5

Net Gain = 200k - 47k (indexation) = £153k

Chargeable Gain After Applying Taper relief at 60% = 153k x 0.6 = 91.8k

Chargeable Gain After Applying Residential years = (15.25-8.5)/15.25 x 91.8k = £40.6k

Chargeable Gain After Applying lesser of £40k and PPR relief = £0.6k

As this is less than my annual CGT exemption (£8.8k), I would be fully exempt?

Have I applied too many exemptions or was the order that exemptions applied about right?

Finally, with regards to interest relief against letting income, how would you recommend that I arrange this? At the moment, I have simply shown on a balance sheet that I have withdrawn £90k of capital from my property's "business" on the date that I started a new mortgage for my new house. I then allocate a proportion of the interest charged on my new house's mortgage as relief against letting income. Is there anything further you would recommend?

Kind regards,

Andy.

al_eebee
Posts:899
Joined:Wed Aug 06, 2008 3:40 pm

Postby al_eebee » Tue Jul 25, 2006 5:35 am

Not quite. Taper is the last thing and it is 60% chargeable not 60% relief, so:

Gain after indexed cost £153k
Exempt 8.5/15.25 x 153k = (85.3k)
Net gain £67.7k

Letting exemption lesser of 40k & 85.3k

Gain after letting £27700
Taper relief 40% (£11080)
Chargeable gain before annual exemption £16620

Annual exemption should be indexed so say £10k

Net chargeable gain £6,620 @ 40% £2,648.

Of course this assumes that all the rules stay the same for the next few years, but the tax would still be a fairly small price to pay on a gross gain of £157k.

Sound like you have got it pretty much right on the refinancing. Look at example 2 in the HMRC Business Income Manual BIM45700 if you have not already- http://www.hmrc.gov.uk/manuals/bimmanual/BIM45700.htm


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