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TonyTax
TonyTax, Tax Consultant
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My partner and I have a second property. It was my partners

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My partner and I have a second property. It was my partners flat before we met. The mortgage is a residential, interest only mortgage in my partners name alone. the flat was purchased in 2002. It was my partners only property and she lived in it on and off until 2008.
For the last 6 years its been let out to private tenants for 3 years of those years, and let to a family member for the the remaining 3 years.
The flat was originally purchased for £97.5k, we owe £85k on the mortgage. The flat has recently been valued at £165k.
In April 2012 we bought a house together in both our names. We have a residential repayment mortgage on this family property. We live in this property full time.
We would like to release some equity from the flat (approximately £38k) which would mean transferring it to a buy-to-let mortgage. We would like to use the equity to fund buying another family home for us to live in.
The question is, would we be subject to capital gains tax if we release some equity?
TonyTax

Hi.

You won't incur a CGT charge by releasing equity by borrowing against the second property as opposed to selling it. However, when it is sold, you will have built up debt on the property which you will need to repay from the sale proceeds and none of that debt will be taken into account in computing the capital gain.

If you sold it now, for example, there would be a gain of £67,500 (£165,000 - £97,500). Some of that gain would be exempt from tax and some would be covered by letting relief with the balance being taxable. Take a look at HS283 here for more information on the main residence and CGT.

One thing that may be a problem. If you haven't done so already, you need to avoid putting the second property into joint names until you have considered the CGT position. In order for the individual who is being added to the deeds to effectively inherit 50% of the the original owner's main residence relief and letting relief, the property has to be put into joint names at a time that you are married or in a civil partnership and the property is your main residence and you are living there.

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

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Customer: replied 3 years ago.

Thanks for the answer.

There is some further information my partner has just shared.

She has let the flat out for all but 18 months of the ownership period.

After reviewing HS283, if we were to dispose of the property now the gain would be £67,500.

We would get private residence relief on the 18 months she had it as a main residence and the last 36 months, equating to 54 months relief out of a total 156 months ownership. Therefore 54/156=0.346 which equates to relief of £23,355.

The remaining let period is 102 months therefore 102/156=0.654 which equates to £44,145. However the cap is the amount of Private Residence Relief already calculated, or £40,000, or the amount of any chargeable gain you make because of the letting (calculated as a fraction of the gain – the fraction being the period of letting/divided by the period of ownership), whichever is the least.

Which means the chargeable gain is £44,145-£23,355 = £20,790.

We would utilise the capital gains tax annual exempt amount of £11,100 therefore the amount subject to tax is £20,790-£11,100 = £9690.

My partner and I are both higher rate tax payers therefore tax is charged at 28% therefore we would have to pay the inland revenue £9690x0.28 = £2713.20

Are my assumptions and calculations correct Tony?

Thanks - Paul

First off, unless you are married or in a civil partnership and the property was put into joint names whilst it was your main home during your part-ownership of it, your share of any gain (if you do own half of it) will not be reduced by same amounts of main residence relief and letting relief as your partner's. Letting relief is up to £40,000 per part owner.

First off, only the last 18 months of ownership of a property which has been the main residence of the owner will be tax free. This is for post 5 April 2014 disposals.

Letting relief is the lesser of £40,000, the exempt gain (the sum of gain for the period of occupation and the gain for the last 18 months of ownership) and the gain for that part of the letting period not covered by the last 18 months of ownership.

A 40% taxpayer will pay CGT at 28%
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Customer: replied 3 years ago.

"First off, unless you are married or in a civil partnership and the property was put into joint names whilst it was your main home during your part-ownership of it, your share of any gain (if you do own half of it) will not be reduced by same amounts of main residence relief and letting relief as your partner's. Letting relief is up to £40,000 per part owner."

Am I understanding you correctly, I take it it wouldn't be beneficial to keep the property in my partners name for capital gains reasons? Other than that I think I need a clearer explanation of what your statement means.

Has the law changed with regards ***** ***** number of months qualifying for relief from 36 months to 18 months?

Is there a capital gains exemption amount of £11,100?

Were my calculations in my previous email accurate?

Thanks - Paul
You said the flat was in your partner's name. So what have I said in my answers that suggests it "wouldn't be beneficial to keep the property in my partners name for capital gains reasons?" I was saying exactly the opposite.

If a couple marry, they acquire certain tax breaks. One of those concerns homes. If one of the spouses lived in a house for ten years before marriage and then it was put into joint names with the other spouse who lived in it for five years before it was sold, then whilst the second spouse only lived in it for five years, they will be treated as having acquired their half-share at the same time as their spouse with a cost equal to half the original purchase price.

The statement in the previous paragraph would not be the case if the property was put into joint names at a time when the couple were not living in it or it was not their main home. The new part-owner would still take half the original cost but they would not benefit from their spouse's period of residence for CGT purposes. That would make their share of the gain taxable.

Read the notes between "Inter-spouse transfers" and "Tip" here for more explanation and some examples.

For disposals after 5 April 2014, only the last 18 months of ownership are given as a tax free period.

The CGT exemption for 2014/15 is £11,000. For 2015/16, it is £11,100.

The calculations weren't accurate as you took the gain for the last 36 months of ownership as tax free. As mentioned above, it should be 18 months.
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Customer: replied 3 years ago.

Thanks for the clarifications.

It's a minefield hence the reason to ask questions, apologies if my interpretations aren't accurate, and create frustration.
No problem. I thought maybe that a part of my answers was missing.
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