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TonyTax
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15946
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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My late husband bought a small property in 1985 for 40k before

Customer Question

My late husband bought a small property in 1985 for 40k before I had met him. He lived in it for two years,then went away to uni to retrain and let out the property. It has been rented out ever since. We married in 1993. The property remained in my husbands sole name. In Nov 2010 the mortgage was paid off and my husband gave me half the property and put it into our joint names. Very unexpectedly my husband passed away in May 2011 after a short illness. I inherited the property which at the time was estimated as being worth 190k. I have continued to rent it out. However I am now considering selling and want to know how much capital gains tax I would have to pay. Also can I claim letting relief? And lastly if I am liable for a large bill, how long would I have to make it my home before I could eradicate the CGT.It is ironic that if I had my husband not given me the half shortly before he became I'll then I don't think I would have been liable for any!!
Submitted: 3 years ago.
Category: Tax
Expert:  TonyTax replied 3 years ago.
Hi.

I realise that you may not know this but are you able to tell me which month in 1985 the property was bought by your late husband please.
Customer: replied 3 years ago.
October
Expert:  TonyTax replied 3 years ago.
Thanks.

Leave this with me while I do some calculations and draft my answer. It will take a while so please bear with me.
Customer: replied 3 years ago.
Ok thank you.
Expert:  TonyTax replied 3 years ago.

My apologies. I neglected to ask for a piece of information.

Can you tell what the property is worth now please.

Customer: replied 3 years ago.

Yes I haven't had it valued recently but I would think it would fetch about 210k
Expert:  TonyTax replied 3 years ago.
Thanks.

I'll get back to you with my answer in a bit.
Customer: replied 3 years ago.

Many thanks
Expert:  TonyTax replied 3 years ago.

Hi again.

When your husband put the property into joint names, you took half the original cost, £20,000, and the purchase date as your own. You inherited the other half of the property when your husband passed away so that half has a CGT cost of £95,000. Your total cost for CGT purposes is £115,000. If you sell the property for £210,000, you will make a gain of £95,000.

SALE (EXCHANGE OF CONTRACTS) BY 5 APRIL 2014

By April 2014, the total ownership period will have been 343 months. Your husband lived in the property for 24 months and it will have been let for 319 months.

The gain for the period the property was your husband's main home (and yours by extension) willl be exempt from CGT as will the gain for the last 36 months of ownership. That accounts for £16,618 (£95,000 / 343 x 60). The remaining gain of £78,382 is that part of the letting period gain which is not covered by the last 36 months of ownership (£95,000 / 343 x 283).

As the property was both your husband's main home (and yours by extension) and it was let you are entitled to letting relief which is the lesser of:

1 £40,000,

2 the sum of the main residence gain and the gain for the last 36 months of ownership of the property which is £16,618 and

3 the letting period gain of £78,382.

Letting relief of £16,618 will reduce the remaining gain of £78,382 to £61,764 and the annual CGT exemption of £10,900 will reduce it further to leave you with a net taxable gain of £50,864.

SALE (EXCHANGE OF CONTRACTS) AFTER 5 APRIL 2014

The exemption for the last 36 months of ownership is being reduced to an exemption for the last 18 months of ownership with effect from 6 April 2014. So, if you sell on 6 April 2014, the figures will be as follows:

Exempt gain £11,633

Letting period gain £83,367

Letting relief £11,633

Taxable gain £71,734 less annual CGT exemption of £11,000 leaves a net taxable gain of £60,734.

There are two rates of Capital Gains Tax, 18% and 28%. The rate or combination of rates that will be charged will depend on the level of your income in the tax year you dispose of the property. For a sale in 2013/14, one of the following scenarios would apply:

1 If your income in 2013/14 including the taxable gain is £41,250 or less, then all the taxable gain will be charged at 18%.

2 If your income in 2013/14 excluding the taxable gain is more than £41,250, then all the taxable gain will be charged at 28%.

3 If your income in 2013/14 excluding the taxable gain is less than £41,250 but more than £41,250 when you add the taxable gain to it, some of the taxable gain will be charged at 18% and some at 28%.

The figures for 2014/15 will be similar, save for the taxable gain being larger.

How long you would need to live in the property to wipe out the taxable gain is really impossible to say as it will depend on what happens to property prices and tax rules in the future.

 

I hope this helps but let me known if you have any further questions.

Customer: replied 3 years ago.

Thank you very much for your answer, I would just like to clarify, are the last three years exempt even though my husband only had it as his home for the first two years? Also is it these initial two years that qualify me for claiming letting relief? Finally if I were to live in the property as my main home for just one year, (which is a possibility ) could you say if that would at least reduce the amount of CGT I would have to pay? Thank you
Customer: replied 3 years ago.
If my income is 23
K what proportion of the CGT would be at 28% thank you. This us my last query , thank you so much, it is all very clear so far
Expert:  TonyTax replied 3 years ago.

So long as the property has been the main home of the owner at some point during their ownership of it, the last three years of ownership is given as a tax free period even if they were not living in it. Letting relief is only given where a property has been both the main residence of the owner and it has been let.

You might ask why you should qualify for the reliefs as you may not have lived in the property. Since your late husband put the property into joint names, you as his wife took half the purchase cost, the purchase date and his history of ownership as your own.

I wanted to show you an example of a case where a man owned a property, got married and moved into his new wife's home. His property was then let. Before it was sold, the letting ended and the husband put the property into joint names with his wife. As a result, they lost out on some letting relief as the property was not let during the wife's period of ownership. She did, however, qualify for some main residence relief notwithstanding the fact that she had never lived in the property. I cannot you show that example as it is in the membership area of a tax website I subscribe to and if I posted a link, all you would see would be the home page.

The idea behind the transfer of main residence relief and letting relief is to avoid a married couple losing out when a property is transferred into joint names. That would go against the principle of transfers of assets between married couples being tax neutral save for the letting period mistake the husband made in the example.

If you moved into the property for a year, that year's gain would be exempt. However, you are given the last 36 months or the last 18months as a tax free period in any event.

If your gross income is £23,000, you would pay tax at 20% on £13,560 assuming you are under 65 years of age. The basic rate tax band for 2013/14 £0 to £32,010 of taxable income so you would pay CGT at 18% on £18,450 (£32,010 - £13,560) of the taxable gain. It would not be much different in 2014/15.

TonyTax and 2 other Tax Specialists are ready to help you
Customer: replied 3 years ago.
Thank you you have been very helpful
Expert:  TonyTax replied 3 years ago.
Thanks.

I should have said that the excess of the taxable gain over £18,450 or so will be taxable at 28%.