Property and Tax Issues

Isis' Maggie Fleming answers readers questions in Saturday's Daily Telegraph newspaper for the Property Clinic section.

The questions and answers are reproduced for you here.

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My wife and I both owned our own flats when we first met. She moved in with me in April 1997 and we were married in 1999. Her flat has been let out from 1997 until now and the income has always been shown on her tax returns. Now we want to buy a bigger place but are worried about Capital Gains Tax (CGT).

The estate agent thinks the flat will sell for around £160,000; she bought it for £45,000 in May 1995. What is the bill likely to be? Would it be a good idea for her to gift me half of it before sale? How do we do this and how much would it cost? We are both basic-rate taxpayers.

Maggie Fleming writes:

On the figures you have given me, it is likely that your wife will have no tax to pay on the sale of the flat, as the tapered gain should be comfortably within the annual exemption.

Before calculating the gain, you can deduct the incidental costs of purchase and sale (eg legal fees, Stamp Duty and estate agents' charges); the cost of any capital improvements may also be allowable.

Her total period of ownership of the property is roughly 11 years. She lived in the flat for two years and the final three years are always deemed to qualify for principal private residence relief. Therefore 5/11ths of the gain is exempt.

As the property was let furnished, a further amount of up to £40,000 is exempted - your wife would qualify for the maximum. There is also indexation allowance of approximately £4,000 for the period from purchase up to April 1998, when the allowance was abolished and replaced by taper relief.

If the property is sold in the current tax year, the gain will be reduced by 30 per cent because of taper relief - but if you wait until after the start of the new tax year on April 6, it will be reduced by 35 per cent. The annual exemption (currently £8,500) will also go up on the same date.

In this case, it would not be to your advantage for your wife to gift an interest in the property to you prior to sale, as only she would qualify for the extended exemption due where the property has been let out as residential accommodation. Indeed, if she did transfer an interest to you, while she would pay no CGT, you could end up with a hefty tax bill.

In 1993 my wife and I moved into the middle house of a terrace of three cottages. In 2003 one of our neighbours passed away. We purchased her house and subsequently undertook some work to create a single residence. We advised the local authority and utility companies of our change of circumstances, as a result of which we are treated as a single residence. However, the two properties are still registered as separate freeholds at the Land Registry.

We now want to move. However, our local agent tells us that it would be in our best interests to reinstate the houses as separate dwellings in order to sell them. Our problem is how HM Revenue and Customs will treat the disposal of the house (or houses) if we do this? From what we can gather, we should be entitled to dispose of our principal residence in part or whole, or indeed in whatever way we see fit.

Maggie Fleming writes:

The legislation is silent on situations such as this and I could find nothing published by HM Revenue & Customs to indicate its likely approach. Therefore, we need to start from basic principles. The law exempts a "dwelling-house" that has been your only or main residence throughout your period of ownership. The term "dwelling-house" is not defined but I suggest that it would include two properties used as a single residence.

To my mind, what matters is how you and your wife have used and thought of the property while living there, not the fact that it is to your advantage to sell the freeholds separately. Therefore, I believe you qualify for the relief in full.

Were HMRC to challenge your right to the relief, you have various factors in your favour, such as the fact that the property has been treated as a single household by the local authority. I assume that you have internal doors between the two properties and that is also important. I recommend that you take photographs of the internal doors before any alterations are made, just in case HMRC requires evidence.

Of course, if you are confident that what you have disposed of does qualify for the relief in full, you need make no mention of the disposal on your tax return.

My husband and I own a house which we let out because we have accommodation included in our work. The house is worth in the region of £160,000-£170,000.

My son and his fiancee would like to buy their own house when they get married later this year. They are able to raise about £120,000 for a mortgage.

We are considering selling them the house so that we retain a part interest in it; that is, they pay £120,000 and the rest belongs to us.

What are the implications for us as regards Capital Gains Tax (CGT), which under the current situation we are not liable to? Would we be liable at a future date?

Maggie Fleming writes:

First of all, I assume that you are correct in thinking that the property is currently exempt from CGT. You are probably thinking of the job-related accommodation provision whereby, if it is necessary or customary for employees in your line of work to live in accommodation provided by the employer, for the better performance of their duties, they can claim total exemption for a property which they buy with the intention of living in it at a later date. Note that the provision of accommodation by the employer must be necessary or customary - not simply a matter of choice by either of you.

With this provision, it is your intention to occupy the property in the future that is crucial. If your intention changes, you would lose the relief at that point. The sale of part of the property to your son and his fiancée would be treated as taking place at open market value but would be exempt from the tax, as it is your principal private residence.

But HM Revenue & Customs could question your future intention as to your remaining interest in the house. Do you intend to live in it with them at a later date? If not, it will no longer qualify for relief from the date your intention changed. This is a complex matter and you should seek professional advice.