Capital Gains Query


M

mitchino

I was gifted a farm building from my mother in June 1999. It's value
was around £100,000. In June 2001 I moved in with my partner to a
seperate house where we shared the mortgage and were both on the deeds.
In 2003 I started to convert the farm building to a house, which is now
complete. I split up from my partner in May 2005, came off the deeds
and was removed from the mortgage, and moved into the converted farm
building, which was then my only residence. My partner and I have
recently had a reconcilliation, and I am going to move back in to her
house and sell the farm building. It's market value is likely to be
around £400,000.

Am I liable for Capital Gains Tax on the sale? If so is there a way to
arrange things to minimise the liability?

Thanks,

DM
 
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R

Ronald Raygun

mitchino said:
I was gifted a farm building from my mother in June 1999. It's value
was around £100,000. In June 2001 I moved in with my partner to a
seperate house where we shared the mortgage and were both on the deeds.
In 2003 I started to convert the farm building to a house, which is now
complete. I split up from my partner in May 2005, came off the deeds
and was removed from the mortgage, and moved into the converted farm
building, which was then my only residence. My partner and I have
recently had a reconcilliation, and I am going to move back in to her
house and sell the farm building. It's market value is likely to be
around £400,000.

Am I liable for Capital Gains Tax on the sale?
Yes.

Suppose you sell in June 2006. That would give you 7 years of ownership.
The last three years qualify for PRR because it has been for a time your
PPR. To calculate your gain start with the £400k and deduct the
acquisition value of 100k and the conversion costs (materials, fees, and
labour but not your own) and the expenses involved in the sale (estate
agent fees etc). Suppose this comes to £280k. PRR reduces this to
four sevenths, £160k. Taper relief should take off another 25%, so
your taxable gain will be £120k, minus your personal allowance of
almost £9k. On the remaining £111, expect to pay 20% of that part of it
which corresponds to how much your other income is short of the higher
rate limit, and 40% on the rest (i.e. most of it). You're looking at a
tax bill of some £40k.
If so is there a way to arrange things to minimise the liability?
(1)
You could persuade your partner to sell her place and move into the
farm house with you, thereby not only postponing the problem, but in
the fullness of time increasing the proportion of the period of
ownership during which the property will have been your main home by
the time you sell it.

(2)
You could marry your partner and then gift half the property to her.
Then you would get the benefit of two £9k personal allowances, but
you would lose half the PRR because the property will have been your
home for a time but not hers.

(3)
You could do both (1) and (2), thereby not losing half the PRR.

Or you could just pay the damned £40k and be done with it. It would
still leave you with £360k which is not to be sneezed at. Use some of
the money to buy half your partner's place, and she can pay off her
mortgage with that.
 
M

mitchino

Thanks for your reply Roland. I have a couple more questions...

When I was gifted the building in 1999, how is the value back then
arrived at? I estimated it at £100,000, but obviously if it was worth
more than that then my gain would be reduced?

I have read in the revenues' guidelines that "if you do not occupy your
home when you acquire it because you have to carry out renovations, you
can treat the first 12 months as if the house had been your only
residence, and in exceptional circumstances up to 2 years is allowed"
The farm building was uninhabitable from when I acquired it in June
1999 until the renovations started in July 2003. Do I qualify for any
extra relief?

The cost of the renovations/legals etc is £230,000-£250,000.
 
R

Ronald Raygun

mitchino said:
Thanks for your reply Roland. I have a couple more questions...

When I was gifted the building in 1999, how is the value back then
arrived at? I estimated it at £100,000, but obviously if it was worth
more than that then my gain would be reduced?
Indeed it would. Meanwhile the renovation is done and all evidence
(or do you have photos? plans?) of what state it was in is gone.
A valuation done at the time would have been a good idea, and
could have mattered for IHT purposes if your mother had died.
I have read in the revenues' guidelines that "if you do not occupy your
home when you acquire it because you have to carry out renovations, you
can treat the first 12 months as if the house had been your only
residence, and in exceptional circumstances up to 2 years is allowed"
The farm building was uninhabitable from when I acquired it in June
1999 until the renovations started in July 2003. Do I qualify for any
extra relief?
I would have thought those reliefs apply only in circumstances where
the purpose of the acquisition was that the property would become your
home, and that the only thing preventing this happening is that
renovations would need to happen first, and indeed would be carried
out within the 1-2 year time frame. In your story that seems not
to have been the case, as you waited 4 years before even starting
to do anything towards that end.
The cost of the renovations/legals etc is £230,000-£250,000.
Well there you go, that reduces your gain to only £50-70k, and
then 75% of 4/7 of that, minus £9k, putting your tax bill well
down into single figures. Nothing to worry about except that
someone might try to amend your estimated £100k downwards.
 
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M

mitchino

Thanks, it's all becoming a lot clearer - when you first look at the
CGT rules, it seems like a terrifying amount they're going to take, but
when you calculate it all out it's not so bad.
 

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