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TonyTax
TonyTax, Tax Consultant
Category: Tax
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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I inherited a property in 1999 which had a. Alue of £100K (the

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I inherited a property in 1999 which had a. Alue of £100K (the actual value was £150k but there was a sitting tenant so the value was reduced. The approximate value is now £320k. The property is currently rented out but i am thinking of selling. I am a lower rate tax-payer. Will I be liable for CGT on the 320K minus the 100K or 150K value?
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.

Hi.

You will pay CGT on the sale proceeds less the sitting tenant value of the property when you inherited it, £100,000. Had you sold it as soon as you inherited it, you would only have received £100,000 (assuming the valuations at the time were accurate) because of the sitting tenant. A sitting tenant with secure tenure will devalue a property in the same way as plans for a motorway at the bottom of the garden will. A valuation should reflect all encumbrances.

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

Customer: replied 2 years ago.
Thanks. So the current value is £320K - £100K value when inherited means that I would pay CGT on £220K at the lower tax rate. What would that tax rate be 18%?
Also, what is the best way of passing the property onto my 2 children. Should this be done prior to my death?
Expert:  TonyTax replied 2 years ago.
The taxable gain will be £208,900 (£320,000 - £100,000 - £11,100 annual CGT exemption) if the property is sold in the 2015/16 tax year. If the property has been your main home during your ownership of it, you will be entitled to a deduction from the gain for main residence relief and letting relief. Letting relief is not available if no main residence relief is due. See HS283 for more information.

There are two rates of CGT, 18% and 28%. The rate or combination of rates that you will pay will be determined by the level of your income in the tax year that you sell the property. Assuming you do so in 2015/16, one of the following scenarios will apply:

1 If your income in 2015/16 including the net taxable gain is £42,385 or less, then all the gain will be taxable at 18%.

2 If your income in 2015/16 excluding the net taxable gain is more than £42,385, then all the gain will be taxable at 28%.

3 If your income in 2015/16 excluding the net taxable gain is less £42,385 but more than £42,385 when you add the net taxable gain, then part of the gain will be taxed at 18% and part will be taxed at 28%.

If you give away the property, you will still have a taxable capital gain even though you won't have received any cash for it so, unless you have spare funds to pay the tax, that probably isn't an option. Such a gift would also be a potentially exempt transfer for Inheritance Tax purposes which would fall out of your estate so long as you lived for seven years after making it. Taper relief which you can read about here may reduce any IHT liability after three years.

If the property is passed to your children through your will, then IHT at 40% will apply to that part of your estate which exceeds £325,000 or up to £650,000 if you are widowed and your late spouse's estate did not use the full extent of the nil-rate band available to it. Look here for more information on the transfer of an unused nil-rate band.

I hope this helps but let me know if you have any further questions.
Customer: replied 2 years ago.
Thank you. How would I work out my net taxable gain? What would be included? I do currently receive £800 pm rent on the property.
Expert:  TonyTax replied 2 years ago.
Your net taxable gain is the disposal proceeds less the sum of the probate value (£100,000), disposal costs (legal fees, selling agent fees) and improvement costs (not general repairs and maintenance costs), if any. Deduct £11,100 annual CGT exemption for 2015/16 and you have the net taxable gain. This is assuming the property was never your main home during your ownership of it.
Customer: replied 2 years ago.
Thank you. ***** had a mortgage on the property would that have any effect on the CGT?
Expert:  TonyTax replied 2 years ago.

The mortgage has no effect on the calculation of the gain on the sale of a property. If it did, everybody would get mortgaged to the hilt and never pay CGT.

If you had bought the property, you might have used a mortgage to help fund the purchase price. The purchase price is obviously taken account of in the gain calculation and the mortgage, if there is one, is included in that figure.

TonyTax and other Tax Specialists are ready to help you
Customer: replied 2 years ago.
I thought that would be the case but it was worth checking. Thank you for all your help and advice.
Expert:  TonyTax replied 2 years ago.
Thanks.

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