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TonyTax
TonyTax, Tax Consultant
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I want to calculate the cgt that would be payable on my second

Resolved Question:

I want to calculate the cgt that would be payable on my second property if I were to sell it next year. It is a complicated calculation because it was my home for many years. Can you help please?
Here are the basic facts:
Purchase Price: £172,000
Purchase Date: Feb 1999
Disposal proceeds: £1,200,000
Disposal date: June 2016
Costs of improvements since Feb 1999. - £150,000
The property is owned by my wife and I but only my name is ***** ***** BTL mortgage.
Can you tell me how much I would have to pay please?
Submitted: 1 year ago.
Category: Tax
Expert:  TonyTax replied 1 year ago.
Hi.

Can you tell me the period or periods that you lived in the property please. Was it let? If so, what periods was it let? Is your name on the title deeds? If not, can you explain the mortage situation please?
Customer: replied 1 year ago.

We lived in the property from Feb 1999 to 1st June 2013. It was immediately let and has been let ever since. It will continue to be let until the date of disposal.

The title deeds had to be altered when we set up the BTL mortgage due to my wife's poor credit rating (a credit card debt in the past). So the title deeds are now in my name, as is the BTL mortgage

Expert:  TonyTax replied 1 year ago.
Thanks.

Leave this with me while I draft my answer.
Customer: replied 1 year ago.

Thanks very much.

In case it is relevant, I am self - employed with a gross income of approx £70k in the tax year 14-15 (just doing my return now). My wife has an income of approx £8k per year from part time work.

Expert:  TonyTax replied 1 year ago.

Hi again.

You might refer to HS283 here as for relevant background information. HMRC may ask for proof of the improvement costs in the form of receipts and invoices.

I will give you two lots of figures. The first set will be with you as the sole owner at the time of disposal of the property. The second set will be with the property as jointly owned with your wife at the time of disposal. If you sell the property after it has been vacated and your wife's name is ***** ***** on the deeds after it has been vacated by the tenants, she will not qualify for letting relief as the property will have not been let during her part ownership of it.

YOU AS SOLE OWNER

Period of ownership 209 months

Period of occupation 172 months

Period of letting 37 months

Exempt gain £798,182 (£878,000 / 209 months x 190 months (172 + 18))

Non-exempt gain £79,818 (£878,000 / 209 months x 19 months (37 - 18))

Letting relief £40,000 (lesser of £40,000, £798,182 and £79,818)

Annual CGT exemption £11,100

Net taxable gain £28,718 (£79,818 - £40,000 - £11,100)

CGT at 28% £8,041.04

JOINT OWNERS

Your share of the non-exempt gain of £79,818 will be £39,909 and that will be covered by letting relief of £39,909 so you will have no taxable gain.

Your wife's share of the of the non-exempt gain of £79,818 will be £39,909, there will be no letting relief but the annual CGT exemption of £11,100 will leave her with a net taxable gain of £28,809 on which she will pay CGT at 18%, £5,185.62.

SUMMARY

It would appear that even if your wife got no letting relief, putting her back on the deeds would leave you with a lower CGT liability. This is due to your wife being a basic rate taxpayer.

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

Customer: replied 1 year ago.

Thanks Tony. That is really helpful and very clear. But I have one further question.

Can you tell me what the cgt liability would be if we were to hold on to the property for another 2 years. That is to wait until June 2018 before we sold the property.

Lets assume that the sale price would rise by 5% over 2 years to a total of £1,260,000. And assume that the tax regulations and rates of exemption remained roughly in line with today's.

I ask this because I need to decide whether to sell now or whether to hold on for another 2 year period.

Many thanks in advance.

Regards

Ben

Expert:  TonyTax replied 1 year ago.
YOU AS SOLE OWNER

Period of ownership 233 months

Period of occupation 172 months

Period of letting 61 months

Exempt gain £764,893 (£938,000 / 233 months x 190 months (172 + 18))

Non-exempt gain £173,107 (£938,000 / 233 months x 43 months (61 - 18))

Letting relief £40,000 (lesser of £40,000, £764,893 and £173,107)

Annual CGT exemption £11,100

Net taxable gain £122,007 (£173,107 - £40,000 - £11,100)

CGT at 28% £34,161.96

JOINT OWNERS

Your share of the non-exempt gain of £173,107 will be £86,554, £40,000 will be covered by letting relief leaving you with a net taxable gain of £34,454 on which you will pay CGT at 28%, £9,927.12.

Your wife's share of the of the non-exempt gain of £173,107 will be £86,553, there will be no letting relief but the annual CGT exemption of £11,100 will leave her with a net taxable gain of £75,453 on which she will pay CGT of £17,896.84 (£32,300 at 18% + £43,153 x 28%).

SUMMARY

The exempt gain will be diluted by an extended ownership period of 24 months of letting.
Customer: replied 1 year ago.

Thanks Tony. That gives me a clear decision to make. I will certainly be rating your help highly on the website. May I also ask one more slightly "open-ended" question.

I have been advised by my tax accountant that it would be more tax efficient for me to change my status from sole trader to a limited company which would include my wife as a co-director.

Thus far I have delayed doing so because my mortgage advisor tells me that because I have 2 mortgages - The BTL and my home mortgage - which need to be renewed in the coming months I need to have 2 years' trading accounts in order to have the flexibility to re-mortgage.

However, once I have renewed these mortgages, I am hoping to to move to a limited company status.

How would this affect the CGT liability on my BTL property if I were to delay selling until June 2018?

I hope that's not too complicated a question!

Once again - thanks for your help. Ben

Expert:  TonyTax replied 1 year ago.
When you are self-employed pay tax on your profit, whatever that is.

If you operated your business through a limited company, then you can choose whether to take income from it in terms of salary, dividends or a combination thereof and to effectively manipulate your income level. If you arranged it carefully, you could have a similar amount of your gain taxable at 18% as opposed to 28% as your wife would.
Customer: replied 1 year ago.

Thanks. That much I understand. But my question was if it would have any bearing on my CGT liability. It seems that you are saying it would not affect the CGT liability. Am I right?

Thanks

Ben

Expert:  TonyTax replied 1 year ago.
There are two rates of CGT, 18% and 28%. The rate or combination of rates that you pay is determined by the level of your personal income. If you restrict the income that you take from a limited company, then of course it will affect your CGT liability. You cannot do that if you are self-employed.
TonyTax and other Tax Specialists are ready to help you
Expert:  TonyTax replied 1 year ago.
There is information on how the CGT rates work here.

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