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bigduckontax
bigduckontax, Accountant
Category: Tax
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I spilt up with my previous partner 5 years ago. She remained,

Customer Question

I spilt up with my previous partner 5 years ago. She remained, with our 3 children, in the house that was in our joint names whilst I continued to pay the mortgage.
I purchased a new house with my new partner and I am paying the mortgage on that currently.
My previous partner has substantial family funds and is proposing to buy me out of my half of the old house by paying me £140,000.
Am I liable for Capital Gains tax?
How much would this be?
Is there a way of reducing the tax I may be liable for?
Submitted: 3 years ago.
Category: Tax
Expert:  bigduckontax replied 3 years ago.

Hello, I'm Keith and happy to help you with your question. Firstly, forget the mortgage payments; they do not feature in Capital Gains Tax (CGT) computations. However, I do need to know when you purchased your house with your new partner and whether you made any elections as to which residence you intended to use for Private Residence Relief. Also were you and your partner actually married and what was the original price of the house. Meanwhile, I am researching.

Customer: replied 3 years ago.

Hi Keith,

I split up with my previous partner in October 2009 and then purchased my other house with new partner in May 2011.

I didn't make any formal elections in relation to residence for Private Residence relief.

I wasn't married to my original partner, although we had co-habited for 16 years. I am not married to my current partner, although we plan to marry next year in July. My new partner is also a joint owner of our current house

The original purchase price of the previous house was £280,000, hence the £140,000 offer in relation to buying out my half of the house. The mortgage has been paid off within the last 2 months.

I currently have approx. £140,000 outstanding on my mortgage with my current house, which had a purchase price of £205,000.

Regards

Expert:  bigduckontax replied 3 years ago.
I am sorry, my mistake; when did you buy the first house, please?
Customer: replied 3 years ago.

Hi Keith,

The first house was purchased in May 2004

Regards

Expert:  bigduckontax replied 3 years ago.
For CGT calculations of this type you work in months. You owned the old house for 123 months and ceased occupation for 46, however the last 18 months don't count so that falls to 28. You are liable for CGT on 28/123 of the gain you make on the sale of the one half of the original house, which as you say is actually nil. However, HMRC may not wear this and demand that CGT be based on the real value as at current date. However, as i have explained only 28/123 of any gain is taxable and you also have an Annual Exempt Allowance (AEA) of 11K to deduct in addition. Any surplus is taxed at 18% or 28% or a combination of the two rates depending on your income including any gain in the year of sale.
There, without more data I must leave it, but you should be able to compute the gain yourself and do the calculation less the AEA. The application of the rates is a tad more complex and you would ahve to come back to me on that.
I do hope I have helped you and not thrown the whole affair into confusion. Please come back if you have more queries, I shall now be out until lunch time so please delay any response until then.
Customer: replied 3 years ago.

Hi Keith,

Appreciate that you're out at present, if you could respond whenever you get a chance later on today.

Thank you for the information. I understand the applied tax percentage at 18% or 28% and also the 11K personal allowance as I've seen those from the HMRC website.

Would you be able to direct me to the HMRC guidance that refers to the 28/123 calculation? and also where it may refer to the fact that the last 18 months don't count?

Is there a strong case for saying that the tax would apply to gain only, i.e. anything over and above 50% of the original £280,000 purchase price?.

Thanks

Grant

Expert:  bigduckontax replied 3 years ago.
Right Grant; the 18 month rule is actually contained in the Finance Bill, 2014 which has yet to receive Royal Assent and this overwrites the original rule which was the last three years of ownership. You will not find those details on an HMRC web site, you only discover these by experience. You will find the rule in 'Capital Gains Tax on your own home,' but anyway here is the relevant extract:
'What is Private Residence Relief?
When you sell or dispose of your own home you won't have to pay any Capital Gains Tax if you satisfy two conditions. For the whole time you've owned it both the following must apply:
It's been your only home or main residence
You have used it as your home and nothing else
You may qualify for this relief if you sell part of the garden without selling your home at the same time.
Working out the relief
To work out the relief, you need to work out the period that you've owned your home for. This starts on the later of:
The date you bought or acquired it
31 March 1982
It ends on the date that you sell or dispose of it.
The final 3 years (36 months) always qualify for relief. This applies even if you weren't living there during the final 3 years. It must have been your only or main home at some point during the time that you've owned it.
In his Autumn 2013 statement the Chancellor announced that from 6 April 2014 (tax year 2014 to 2015) this final period relief will only apply to the final 18 months of ownership. There will be an exception for people who are disabled or in long-term care. This measure is set to become law later in 2014.'
It is not a strong case, it is the only case; CGT apples solely to net gains made. In your case 50% of the gain over the original purchase price.
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Expert:  bigduckontax replied 3 years ago.
Thank you for your support.