the sale price would be around £240,000
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.
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.
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)
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.
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.
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.
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 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
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.
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?
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.
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.
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%.