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bigduckontax, Accountant
Category: Tax
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Persons A and jointly buy a buy-to-let property for £98.000.

Customer Question

Persons A and B jointly buy a buy-to-let property for £98.000. Subsequently they make an agreement with persons C and D whereby persons A and B are advanced by persons C and D a sum of money which they use for other purposes. An agreement is drawn up whereby interest is charged to persons A and B by persons C and D in an amount equal to the difference between the mortgage and other allowable costs of the property and the rental income. Persons C and D declare this interest as income.
In addition, the following is agreed.
1. Persons C and D can request persons A and B to sell the property at any time.
2. It is agreed by all four parties that, in the event of a sale, any profit made in excess of the sum of £120,000 will accrue to persons C and D.
The property is about to be sold for approximately £155,000.
The solicitor handling the sale will be instructed to clear the mortgage, sales costs etc., repay the original loan made to persons A and B by persons C and D, pay any monies remaining up to the sum of £120,000 to persons A and B, and then pay any monies between £120,000 and the selling price to persons C and D.
My question is this:
Who is liable for the capital gains tax? Clearly, persons A and B have a capital gain of £22,000 minus any allowable costs. Persons B & C have a capital gain of the difference between £120,000 and the selling price although they do not own the property.
If persons A and B are liable for the full amount, they are being asked to pay CGT on gains which they have not made. Conversely, persons C and D would have a capital gain which they would not, and could not declare which would, presumably, be illegal. The same gain cannot be declared by all four persons.
Submitted: 2 years ago.
Category: Tax
Customer: replied 2 years ago.
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Customer: replied 2 years ago.
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Expert:  bigduckontax replied 2 years ago.
Hello, I am Keith, one of the experts on Just Answer, and happy to be able to help you with your question.
In the scenario quoted A & B have a Capital Gains Tax (CGT) liability as they own the property and must declare the gain in their annual self assessment tax returns. Their arrangements with C & D are irrelevant tax wise. Of course C & D can always reimburse A & B for any tax liability, but that is a private arrangement and outside the scope of tax.
I do hope that I have been able to shed some light on your conundrum.