Capital Gains post-Transfer of Equity

[gassman]

Hi, I hope the answer isn’t too obvious but forgive me as I have limited knowledge of CGT. Apologies this is long...!

In 2006, I purchased a property for 200k with a friend, with a mortgage, as tenants in common. I paid 9k of the deposit, he paid 1k (with an agreement that if we sold, any equity would split 90/10).

In 2011, he decided he wanted to sell as he intended to move in with his girlfriend. We had paid off around 10k of the mortgage, but as property prices had only just started to recover post-crash, the property was only worth about the value of the outstanding mortgage (190k). He agreed to walk away and transferred his “equity” (I use the term for technical purposes only - he had no true equity but only a liability) to my girlfriend (now wife) and me. This was done via a solicitor, TR1 etc. which effectively changed the title from my name + his name to my name + my girlfriend’s name. We have had a joint mortgage on the property since then.

We have rented the property out since we took his share of it, and it’s now worth around 230k. We intend to sell it soon.

To make matters slightly more complicated, I am a higher rate tax payer, wife is basic. Due to other investments neither of us will have our full CGT allowance this year although I don’t have precise figures to hand.

So... who pays CGT and on what value?! We both effectively took a share at different price points. In fact I sort of took half a share at one point then 25% at another! And in relation to the TR1 process, no “equity” was exchanged, so who decides what the property was actually worth at that time? Can all fees relating to the transfer deductible, and by whom?

[bd6759]

In fact I sort of took half a share at one point then 25% at another!

That's where I got lost.

At the start you said that you acquired 90% and your friend acquired 10%. Your friend then gave his 10% to your wife. So where does this half share and quarter share come from?

If the ratios have always been 90/10 then that is how they remain. You might want to change the ratio before you sell. I presume you lived in it for a while?

(NB, as it stands your acquisition costs is £180,000 and your wife's cost is £19,000. It is simple arithmetic).

[gassman]

Hmmmm... apologies I may have confused things. I may well have confused myself!

The friend and I actually owned the property 50/50. We paid the mortgage 50/50 - interest and capital and the contract/deeds/title were arranged as such. The deposit split was more of a personal arrangement - in fact he always planned to pay me 4k at some point to balance out the deposit split.

He and I, then wife and I lived in the property for about 3 years and 1 year respectively.

Perhaps it’s best to ignore my half share and quarter share point. What I really need to know is what my gain is, and what my wife’s gain is given that we acquired our shares at different times and at different prices.

As I see it, I acquired half of the property in 2006 for 100k (200/2). I still own half of the property so if it now sells for 230k, I have gained 15k (230/2 - 200/2).

My wife only took her share of the property in 2011 when it was worth about 190k. Her share was therefore worth 95k. If it sells at 230k, her share of that is 115k. So has she gained 20k?

Or do I need to consider the fact that in 2011 the transaction that took place effectively disposed of my share at that original purchase price (200k) and re-acquired the share at the new value (190k) so my gain at that point was -5k, and therefore both my wife and I now base our gain on the 2011 value (which is hypothetical in any case as it was a transfer with no exchange of cash, rather than an actual sale, so the value is based only on the value of the outstanding mortgage liability at that time)?

Or conversely, can my wife simply assume the value of her share to be the 2006 purchase price given that this is the share she took over from the friend in 2011 and it hasn’t actually been “sold” at any alternative price since that time. We all simply assumed the value to be 190k and therefore no money changed hands.

I expect that is as clear as mud! Thanks for your patience

[bd6759]

Forget about your last 2 paragraphs.

If you believe that you owned the property 50/50 then so be it. It really doesn't matter that much. Your base cost is £100,000 and your wife's base cost is £95,000, and the gains would be as a you suggest.

However, you will both be entitled to reduce your gains by residence relief and lettings relief.

For each of you, you need to calculate:
g = your gain (as computed above)
x = number of months you owned the property
y = number of months you lived in the property plus 18 (the last 18 months of ownership count as a period of residence)
z = number of months property was let (but not counting any months that fall within the last 18 months of ownership)

r = Residence relief = g * y/x
l = Lettings relief = g * z/x (limited to the lower of l, r or 40,000)


Your taxable gain is g - r - l