Captital Gains Tax On Buy To Let January 2009
Isis Financial Planners' Maggie Fleming answers reader's questions in Saturday's Daily Telegraph newspaper for the Property Clinic section.
There is a wealth of information on all aspects of property and tax from Capital Gains Tax and Inheritance Tax to other technical and challenging issues of this complex subject. This page shows the articles forJanuary 2009. To browse the articles from a previous year, please visit the main Property and Tax page of this website.
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- Captital Gains Tax On Buy-To-Let - 26 January 2009
- Capital Gains Tax, Inheritance Tax and Income Tax implications on property gift - 16 January 2009
- Capital Gains Tax (CGT) Implications On Splitting A House Into Two Properties - 5 January 2009
Captital Gains Tax On Buy-To-Let- 26 January 2009
My partner owns a buy-to-let property in the UK. She moved to Ireland in May 2005 and obtained consent from HM Revenue & Customs to be a non-resident landlord, paying income tax on the rent since. I understand that if she sells her property now and does not return to this country for five years she will not have to pay Capital Gains Tax. Is this correct?
Maggie Fleming writes:
To be liable for Capital Gains Tax (CGT), you must be either resident or ordinarily resident in the UK. However, in 1988, HM Revenue & Customs introduced an anti-avoidance measure to prevent people using a relatively short period of non-residence to avoid paying tax on large gains: if a person disposes of assets while not resident and not ordinarily resident, they are still liable to CGT if they resume residence in the UK before five complete tax years have passed.
In your partner's case, this would mean not returning to live here until after April 5 2011. There may be a tax charge in Ireland and she should take advice from an Irish tax practitioner.
I have assumed that your partner is not resident, and not ordinarily resident, in the UK. This will be so if she is working in Ireland on a full-time contract. If not, she needs to heed the following: if you are present in the UK for 183 days in a tax year, you are treated as resident in that year. You are also treated as resident if your visits to the UK average 91 days over four tax years.
Capital Gains Tax, Inheritance Tax and Income Tax implications on property gift - 16 January 2009
My 72-year-old sister was widowed 10 months ago. Her house, which is unmortgaged and worth about £250,000, is still held in joint names with her deceased husband. She now wants to gift half of it to her only daughter, who already owns her own property. I am concerned as to the capital gains, inheritance and income tax implications.
Maggie Fleming writes:
This is not a wise move from a tax point of view. Your sister will have inherited the house automatically by survivorship if she and her late husband owned it as joint tenants, which is the usual situation with couples. The value of the house is within the inheritance tax nil rate band, which is currently £312,000 and increases each year. If your sister's other assets do not take her over that limit, there will be no inheritance tax to pay on her death. If her husband left everything to her, her estate can make use of his unused nil rate band, doubling the amount that can be left free of IHT on her death. In any case, gifting a share of a property that you live in is not effective for IHT purposes. It is a gift with reservation of benefit and would remain in your sister's estate.
While the gift would be ineffective for IHT, it would be all too effective for capital gains tax. On eventual sale, your niece would be liable to tax on the increase in value of her share.
If no gift is made, there will be no CGT on your sister's death.
Capital Gains Tax (CGT) Implications On Splitting A House Into Two Properties - 5 January 2009
We have owned a four-storey house in Newcastle since 1984 and have lived there full-time, after working in London, since 2006. It's so big that we obtained planning permission to convert the basement to a flat, the aim being to sell both properties this year and move back south. What are the Capital Gains Tax (CGT) implications?
Maggie Fleming writes:
There are two issues. The first is how many years of ownership qualify for exemption under principal private residence relief. I would have liked to know what you were doing between 1984 and 2006. Was it purely an investment property? In that case, the gain attributable to the period from 2006 until sale will attract the relief. In addition, there will be some relief (potentially up to a maximum of £40,000 for each of you) for the gain attributable to any period when it was let out. Or did you also live in it before moving to London to work? In that case, you could claim relief for further periods of up to seven years' absence.
The main issue is how HMRC will view your conversion of the property into flats, followed by a sale. Given the length of ownership, they will probably not suggest that you are trading as property developers. Their most likely approach is to seek to restrict the available principal private residence relief on the grounds that you incurred expenditure (the conversion costs) in order to realise a gain on sale. The calculation is complex but, basically, they compare the sale proceeds with what you would have most likely received had you not converted the building and the excess gain is taxed in the normal way.
If you sell the property with planning permission rather than converting it yourselves, that should not affect the amount of principal private residence relief due. Get advice from a qualified tax practitioner on the matter.
Paul & Ian
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