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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 currently own a buy to let property which used to be my principal

Resolved Question:

I currently own a buy to let property which used to be my principal place of residence. I believe I therefore qualify for Principal Residence Relief (for part of the period of ownership - 5 years relief as it was my principal residence for 3.5 years) and Private Lettings Relief (up to £40k). The property is currently in my own name, but I was considering setting up a deed of trust such that the beneficial ownership of the property passes to my wife who is a lower rate tax payer. I assume there is no CGT payable upon entering into the deed of trust and therefore my question is whether entering into the deed of trust will impact my Private Residence Relief or Private Lettings Relief allowances?
Submitted: 1 year ago.
Category: Tax
Expert:  TonyTax replied 1 year ago.
Hi. If you give the property to your wife, the disposal will be on a no gain/no loss basis so principle private residence relef will be irrelevant. You cannot transfer your accumulated PPR and letting relief to your wife so that her reliefs mirror yours unless the property is transferred to her when it is the main residence of you both. Take a look here and here for confirmation. Rental income has to be split on a 50:50 basis if a property is jointly owned unless it is actually owned in proportions other than 50:50 and HMRC are informed by completing and submitting a form 17 to them. I hope this helps but let me know if you have any further questions.
Customer: replied 1 year ago.
Thanks Tony. The plan would be to transfer 100% of the beneficial interest of the property to my wife (who also used to live in the property with me, albeit before we were married) and thus 100% of the rental income would be payable to her and taxable at her marginal income tax rate. Could I understand better what you mean when you say I couldnt transfer accumulated PPR and letting relief to my wife, does that mean the reliefs are lost in full? Or does it mean that the relief would be valid for the period of my beneficial ownership and thereafter my wife would not benefit from any PPR or letting relief for the period under her ownership? IF the former is true, would transferring a portion of the property eg 50% allow the reliefs to be kept (including both CGT allowances)?Many thanksMatt
Expert:  TonyTax replied 1 year ago.
If you give 100% of the property to your wife then, as you are married, the transaction will be on a no gain, no loss basis. So, you will have no gain and no CGT to pay but you would not have benefitted from main residence relief and letting relief since the transfer was effectively CGT exempt. However, your wife will take your cost as her cost for CGT purposes so, if she then sold the property, she would probably have a taxable gain as you have owned the property for 5 years and property prices have moved in the last 5 years. If you transfer 50% of the property to your wife, you will still retain main residence relief and letting relief for your half-share. Your wife would not benefit from main residence relief for her share or letting relief as letting relief is dependent on main residence relief being available. Main residence relief isn't available to her because the transfer won't be happening when the property is the main residence of you both. You would both qualify for the annual CGT exemption.
Customer: replied 1 year ago.
Thanks TonyWould I be able to apply my full main residence and letting relief to my half share if I transferred 50% of the property to my wife via deed of trust, or would I only qualify for 50% of the relief?Matt
Expert:  TonyTax replied 1 year ago.
Whether you transfer a share of the property by deed of trust or via the Land Registry form, any gain will be an exempt gain and so PPR and LR are irrelevant. If you retain 50%, you will get PPR and LR on that when you sell it.
Customer: replied 1 year ago.
Thanks again TonyJust so I am 100% clear, could you confirm whether the below calculations are correct? I have simplified the numbers a bit.Years owned flat: 10
Years lived in flat: 3.5
Years rented flat out: 6.5
Value of flat when bought: £250k
Value of flat now: £500k (post selling costs)If I were to transfer 50% of the flat to my wife then I believe the CGT calculations would be:My gain = (£500k - £250k) x 50% = £125k
PPR = (3.5+ 1.5) / 10 x £250k x 50% = £62.5k (or would it be the full £125k?)
Letting relief = £40k x 50% = £20k (Gain when let = (6.5 / 10 x £250k = £162.5k but max relief available is £40k x 50% = £20k; or would it be the full £40k?)
Total relief available = £82.5k
CGT allowance = £11.1k
Total gain upon which CGT is payable = £125k - £82.5k - £11.1k = £31.4k
Total CGT payable (@28%) = 28% x £31.4k = £8.8kMy wife’s gain = (£500k - £250k) x 50% = £125k
PPR = 0
Letting relief = 0
Total relief available = 0
CGT allowance = £11.1k
Total gain upon which CGT is payable = £125k - £11.1k = £136.1k
Total CGT payable (@18%) = 18% x £136.1k = £24.5kAggregate CGT payable = £8.8k + £24.5k = £33.3kAlternatively if I were not to transfer any ownership of the flat to my wife and hence retain full ownership before selling the flat now I believe the CGT calculation would be:Gain = £500k - £250k = £250k
PPR = (3.5+ 1.5) / 10 x £250k = £125k
Letting relief = £40k (Gain when let = (6.5 / 10 x £250k = £162.5k but max relief available is £40k)
Total relief available = £165k
CGT allowance = £11.1k
Total gain upon which CGT is payable = £250k - £165k - £11.1k = £73.9k
Total CGT payable (@28%) = 28% x £73.9k = £20.7kSo I guess the two key questions are:
1. Are the above calculations correct, particularly with reference to halving the PPR and Letting relief if I were to give my wife 50% of the property?
2. If the calculation is correct, presumably I could transfer a smaller percentage of the property to my wife, eg 20%, and apply the same logic to the calculation?Many thanks in advanceMatt
Expert:  TonyTax replied 1 year ago.
Let me take a look at that and I'll get back to you.
Customer: replied 1 year ago.
Thanks - I just noticed a mistake in the calculation regarding my wife's CGT calculation - please use the below calculations instead:Years owned flat: 10
Years lived in flat: 3.5
Years rented flat out: 6.5
Value of flat when bought: £250k
Value of flat now: £500k (post selling costs)If I were to transfer 50% of the flat to my wife then I believe the CGT calculations would be:
My gain = (£500k - £250k) x 50% = £125k
PPR = (3.5+ 1.5) / 10 x £250k x 50% = £62.5k (or would it be the full £125k?)
Letting relief = £40k x 50% = £20k (Gain when let = (6.5 / 10 x £250k = £162.5k but max relief available is £40k x 50% = £20k; or would it be the full £40k?)
Total relief available = £82.5k
CGT allowance = £11.1k
Total gain upon which CGT is payable = £125k - £82.5k - £11.1k = £31.4k
Total CGT payable (@28%) = 28% x £31.4k = £8.8kMy wife’s gain = (£500k - £250k) x 50% = £125k
PPR = 0
Letting relief = 0
Total relief available = 0
CGT allowance = £11.1k
Total gain upon which CGT is payable = £125k - £11.1k = £113.9k
Total CGT payable (@18%) = 18% x £113.9k = £20.5k
Aggregate CGT payable = £8.8k + £20.5k = £29.3kAlternatively if I were not to transfer any ownership of the flat to my wife and hence retain full ownership before selling the flat now I believe the CGT calculation would be:Gain = £500k - £250k = £250k
PPR = (3.5+ 1.5) / 10 x £250k = £125k
Letting relief = £40k (Gain when let = (6.5 / 10 x £250k = £162.5k but max relief available is £40k)
Total relief available = £165k
CGT allowance = £11.1k
Total gain upon which CGT is payable = £250k - £165k - £11.1k = £73.9k
Total CGT payable (@28%) = 28% x £73.9k = £20.7kSo I guess the two key questions are:
1. Are the above calculations correct, particularly with reference to halving the PPR and Letting relief if I were to give my wife 50% of the property?
2. If the calculation is correct, presumably I could transfer a smaller percentage of the property to my wife, eg 20%, and apply the same logic to the calculation?Many thanks in advanceMatt
Expert:  TonyTax replied 1 year ago.
1 Each part owner is entitled to a maximum of £40K letting relief subject to qualifying for it. In your calculation of your 50% gain, you used £20K so you can add £20K (letting relief is the lesser of £40K, £125K and £125K). You have added the CGT exemption to your wife's gain. Your wife would pay CGT at 18%, 28% or a combination of the two rates depending on the level of her income. Given the size of the taxablen gain, a large part would be subject to CGT at 28%. The calculation of your gain as sole owner is correct. 2 Yes, you could.
Customer: replied 1 year ago.
Thanks againMy wife is a lower rate tax payer and hence is it not the case that she would pay CGT at 18% on her taxable gain or is it more complicated than that?Kind regardsMatt
Expert:  TonyTax replied 1 year ago.
No, you add the net taxable gain to her income. You take the income and deduct the personal allowance of £10,600. Deduct the resulting figure from the 20% tax band of £31,785. What is left tells you how much of the net taxable gain is chargeable at 18%. The balance of the net taxable gain is chargeable at 28%.
Use the calculator here to work out the CGT:
http://www.uktaxcalculators.co.uk/capital-gains-tax-calculator.php
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15883
Experience: Inc Tax, CGT, Corp Tax, IHT, VAT.
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