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Sam
Sam, Accountant
Category: Tax
Satisfied Customers: 13657
Experience:  26 HMRC expertise, PAYE, Self Assessment ,Residency, Rental Income, Capital Gains, CIS ask for Sam Tax
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ok, lets carry on with this Q&A for now. Background information: December

Customer Question

ok, lets carry on with this Q&A for now.
Background information:
December 1999 – purchased Freehold of the building (mortgaged), owned as joint tenants
18 months for the conversion to be completed. We have very few receipts for the conversion of the flats as we firstly had cowboy builders who took a substantial amount (£120k) of our money without completing the work and thereafter had to find other builders.
December 2003 - created 2 leases for the converted flats
January 2004 - took out a buy to let on the flat in which the leasehold is in my sole name.
2009 –mortgaged the flat in which the lease is held in both names as joint tenants
2009 – rented the 2nd flat.
2006 till 2010 – we lived in rented accommodation
2010 – purchased our new house which has been our main home until now.
Questions:
1. In your opinion, would it be better to sell all the properties now rather than gift the 2 leases & the freehold to the 2 children at a later stage?
2. Is there a way of minimising the capital gains liability my husband will have to pay whether now or in future?
3. How is the CGT my husband would be liable for on the transfer to the children calculated?
4. Without receipts for the conversion, how do we prove the costs of the conversion?
Submitted: 2 years ago.
Category: Tax
Expert:  Sam replied 2 years ago.
Hi
Thanks for your new post and asking for me
1. In your opinion, would it be better to sell all the properties now rather than gift the 2 leases & the freehold to the 2 children at a later stage?
With respect to your first question, I am not a financial adviser, so would not even attempt to offer advise on whether its better to sell the properties now (freehold and lease) OR gift them to the children.
But I can advise in simple terms the bigger the profit made, along with the longer the properties are held onto, then the greater the capital gains -
2. Is there a way of minimising the capital gains liability my husband will have to pay whether now or in future?
Only by selling the flats as they are now (one in joint names and one in your sole name) so that the capital gain position is at its minimum, and then you covering the capital gain position of yours(and possibly his) from your share and then gifting him the monies left over. But then if the aim is to hold onto the properties for safe keeping for the children - then for both question 1 and 2 - this might not be a viable option that you wished to enter into.
3. How is the CGT my husband would be liable for on the transfer to the children calculated?
It would be the value at the time of gifting, less the value of the properties at acquisition
So for the flat that was in your sole name, the value at the time you transferred this to him, to be deducted from the market value at the time of gifting, and for the flat that was in joint names, a 50% proportion of the time it was in joint names, and then 100% of the value for the time it was in his sole name.
But of course on the flat that originally was in joint names, he would be due tax relief for the time he lived there, plus a consideration for private lettings relief.
4. Without receipts for the conversion, how do we prove the costs of the conversion?
You would need to try and get receipts - either from the builder that carried out the final conversion, and/or copies of bank statements/credit card statements of materials spent or at a push the trade business that supplied the material might have records (many will only keep for 6 years)
I imagine you would have court records of the pursuit of the cowboy builders, which would detail the money lost due to this attempted conversion (or at least a police record filed)
But if you can not prove any of the cost then this does pose a difficulty with making a legitimate claim for those costs.
Thanks
Sam
Customer: replied 2 years ago.

Hi Sam


To calculate the tax liability, one of the flats was rented as of 2004 but the other, although the lease was created in 2009 we didn't purchase anything else until 2010. Is the tax liability then calculated on the 2nd flat as of 2010?



Also, if at the time of the gift to the children the property is no longer let but neither is it occupied. Is there capital gains tax at that time?



How do you calculate the value of each flat at the time of making the 2 leases, i.e. the property was bought as a freehold house



Is there also capital gains tax to pay on the remaining freehold? so 2 leases plus the freehold of the whole building.



Thanks


Expert:  Sam replied 2 years ago.
Hi Maria
Thanks for your response and further questions
To answer these
To calculate the tax liability, one of the flats was rented as of 2004 but the other, although the lease was created in 2009 we didn't purchase anything else until 2010. Is the tax liability then calculated on the 2nd flat as of 2010?
Whist the capital gain position is viewed over the whole period of ownership, in essence the actual liability reflects from the time the conversion was completed, or from when the whole or either of the flats ceased to be your main residence.
Then costs are considered for the conversions and leases and tax reliefs are applied to consider the time when all and part of the property was your main residence.
Also, if at the time of the gift to the children the property is no longer let but neither is it occupied. Is there capital gains tax at that time?
Yes, as the transfer itself triggers a capital gain occasion regardless of what the occupancy position is with either or both flats.
How do you calculate the value of each flat at the time of making the 2 leases, i.e. the property was bought as a freehold house
You do not, the gain is the sale price less the purchase price, which forms the initial gain. Then from this initial gain the costs to convert and the purchase of the leases are deducted, then this figure split in half, to represent each flat. Then tax reliefs are applied against each flat (so both will have a period of time when they were your main residence to reflect the whole property) and one of them might have a period of time when it became your main residence, and of course private lettings relief would be considered on both, because at some point the whole was your main residence, - and so lettings relief will apply to both of the properties.
And this is then time apportioned if there were periods of time of unoccupancy.
Is there also capital gains tax to pay on the remaining freehold? so 2 leases plus the freehold of the whole building.
This is included as one - under the arrangement above, However if each flat is sold independently and the freehold sold as separate from this, then a capital gain position arises on the freehold as a separate transaction.
Thanks
Sam
Customer: replied 2 years ago.

Thank you Sam

How do I now calculate the total tax liability?

Expert:  Sam replied 2 years ago.
Hi Maria
Thanks for your response
I have added a link here that details how to calculate the capital gain position, although your situation is a little more complex, due to the fact here has been a conversion from one property to two
This being the case, you can either engage an accountant local to you (make sure they are not just familiar with capital gains but also private lettings relief and property conversions. This is to ensure that you do not lose out on the reliefs due.
Or you can come back to Just Answer, and post a new question asking for assistance, and if you would prefer you can always ask for me Sam Tax. Then if another expert picks up the question you have to choice if you wish to wait for me to answer.
But either way - until such time you have decided what to do, and ensure that you have evidence of the property purchase and costs to buy, costs of the value of the property just pre conversion and the costs of each property (flat) post conversion, all the conversion costs and the date of transfer/gift/sale with values at that time and if either property to be sold (rather than transferred/gifted ) then selling costs such as legal fees and estate agent costs.
Plus the dates you lived there as a whole property and the dates the property was let from and two (for each of the flats)
I also urge you to take some financial advise regarding the direction you go with this - so you are making this as cost effective for the short and long term position. I can also, if needed then provide you with the capital gain position for the final scenarios/intentions.
Thanks for your use of Just Answer, and it would be appreciated if you could rate the level of service provided, as this ensures that Just Answer credit me for my time.
Thanks
Sam

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