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Sam
Sam, Accountant
Category: Tax
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Experience:  26 HMRC expertise, PAYE, Self Assessment ,Residency, Rental Income, Capital Gains, CIS ask for Sam Tax
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I purchased my right to buy property from the council around

Customer Question

I purchased my right to buy property from the council around 6 years ago, in that time the property has been continuously rented out. It is my only property and it was not purchased with a buy-to-let mortgage as i did not intend to let the property at the time. I would like to know if i am liable for capital gains tax if i were to sell and if so what percentage? Regards
Submitted: 3 years ago.
Category: Tax
Expert:  bigduckontax replied 3 years ago.
Hello, I'm Keith and happy to help you with your question.

The capital gain is calculated on the sale price less costs and the purchase price plus costs. Can you please give an indication of the sum involved?
Customer: replied 3 years ago.

the sale price would be around £240,000

Expert:  bigduckontax replied 3 years ago.
And the buy price?

Customer: replied 3 years ago.

£55,000

Expert:  bigduckontax replied 3 years ago.
Right, gain of 185K less the 10900 annual allowance leaves a gain of say 174K. please leave this with me to compose my answer.
Expert:  bigduckontax replied 3 years ago.
Right, sorry for the delay. More questons I fear, capital gains tax is not simple.

Is this council house the only house you own? Where were you living whilst the house was let and was that due to the location of your employment? Finally were you living in job related accommodation or a residence provided by your employer?
Customer: replied 3 years ago.

The property is the only one i own. Due to my ill health i have been living with my son for the last 6 years.

Expert:  bigduckontax replied 3 years ago.

I am opting out as there is a rule in the back of my mind concerning medical conditions precluding occupation making an exception to CGT, but I can't locate the reference. One of my colleagues may be better informed on the matter.

Expert:  Sam replied 3 years ago.

Hi

 

I am Sam one of the other UK tax experts.


Could you advise whether you ever lived in this property as your main residence once the purchase was made - the reason I ask as one of the proviso's of making a right to buy purchase is that it is your actual residence, which would suggest that you did in fact live here at some point to allow the purchase to be agreed.

So what month and year was the purchase made, and what month and year did you do to live with your son.

 

Then I can answer your question. I also would need an estimate of what your normal annual income is - and whether you have declared the rents to HMRC (in case additional tax relief is due)

 

Thanks

 

Sam

 

 

 

 

 

 

Customer: replied 3 years ago.

I lived in the property for a matter of months, then moved in with my son. I don't have exact dates to hand but i lived in the property for approximately 6 months before having to let it.


 

Expert:  Sam replied 3 years ago.

Hi

 

Thanks for your response

 

The you will be entitled to come reduction for that time plus the last 36 months of ownership under the main private residence relief rules AND if you declared the rents to HMRC are also due private lettings relief, which can allow up to a further £40,000 exemption, so can you clarify that you declared the rental income to HMRC.

Please also advise your annual income then I can calculate a capital gain estimated position for you, with the appropriate capital gains rates.

 

Thanks

 

Sam

 

 

Customer: replied 3 years ago.

My son has been dealing with all rental income and as the rental income has been going into his account he has been paying the income tax yearly. So although tax has been paid on the rental income i have not technically paid any tax, my son has. My annual income is currently zero.

Expert:  Sam replied 3 years ago.

Hi

 

Thanks for your response

 

Then this needs rectifying as this will be treated as your income, as the property is in your name, and unless this is corrected then you are not eligible for the private lettings relief.

 

So let me show you what a difference it makes

First without the private lettings relief

 

Gain is the sale price less the purchase price = £185,000 (£240K less £55K)

You have owned this property for 6 years and lived in it for 6 months, so the 6 months plus the last 36 months of ownership form an exemption under the private residence relief rules.

So 3.5/6 years x £185,000 = £107,916 exempt

This would leave a gain of £77,084 liable to tax

The first £10,900 is exempt as this is your annual exemption allowance

This leaves £66,184 liable to capital gains tax.

You state that your income is zero (so I assume you get no pensions or benefits, although the rental income is treated as yours but I shall use your figures)

With NIL income this allows the first £33035 of the gain at 18%(equivalent of unused basic rate band) = £5946.30

The remaining gain of £33149 x 28% = £9281.72

Capital gains tax bill of £15228.02

 

If you rectify the rental income position

Then

So 3.5/6 years x £185,000 = £107,916 exempt

This would leave a gain of £77,084 liable to tax

Then private lettings relief which is the lesser of

1) the amount of gain on which private residence relief is due = £107,916

2) The amount of gain left over after private residence relief has been applied = £77,084 OR

3) £40,000

 

As the lesser amount is 3) £40,000 this is deducted from the remaining gain of £77,084 - which leaves £37,084 to consider

Then the first £10,900 is exempt as this is your annual exemption allowance - which leaves a gain of £26,184 to consider

 

Depending on the level of annual rental income you may still have up to £33035 liable to 18% - and as there is only £26,184 of the gain left to consider - then this is charged at 18% = £4713.12 capital gains bill

 

So you can see - that not only must you rectify the rental income position, but that is more cost effective to do so - however you may then be liable to tax on the rental income if its in excess of your personal tax free allowance each year.

But I urge you to put this right with HMRC.

 

 

If you have any follow up questions on my answer, I am happy to respond - but I am due to have a meeting with clients shortly so may not respond until later if that's acceptable.

 

Thanks


Sam

 

Customer: replied 3 years ago.

Hi Sam, thanks for the information, it is very helpful! So if i were to sell the property today for example, my son has been receiving the rental income and paying tax on the income to date. So there would be no way around having to pay the higher (£15228.02) tax bill?

Expert:  Sam replied 3 years ago.

Hi

 

Thanks for your response.

 

yes there is a way around it, that's rectifying the fact that the rental income is legally deemed to be yours and this should be advised to HMRC as such, then when that has been sorted, then you can freely claim the private lettings relief.


Thanks

 

Sam

Customer: replied 2 years ago.

Ok so just to clarify, even though my son has paid income tax on the rental income i can advise HMRC of the situation and will i need to pay income tax on the rent even though it has been paid already?


 


The rental income is around £10,000 per annum.

Expert:  Sam replied 2 years ago.

HI

 

Thanks for your response

 

Yes, that's right, the tax liability should be on you and then you son needs to arrange to get a refund back from HMRC as he has paid tax that he should not have, but I will advise they are likely to only refund tax back for up to 3 years initially as the earlier 3 years are out of the time limits on which HMRC will usually refund tax, so I would suggest your son tries to appeal this, due to the fact he declared income incorrectly, and hopefully they may take this into consideration, as you then will pay the tax due.

 

Then if your annual income is £10,000 net - then your capital gains will be only the first £23035 at 18% and the remainder of the gain at 28%.

 

Thanks


Sam

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