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.

This page contains Questions & Answers from February 2003. Older articles are accessed through our main Property Tax page.

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Isis Financial Planners offers tax planning advice as well as a Tax Self Assessment Service.

I have some extra land attached to my house which has outline planning permission. If I sell up the whole lot (house and extra land), how will Capital Gains Tax (CGT) be applied? The total area is slightly more than the half-hectare plot allowed for CGT purposes.

Maggie Fleming writes:

This is a complex subject. In essence, provided that the house has been your only or main residence throughout your period of ownership, it will attract relief in full, together with that part of the grounds required for reasonable enjoyment of the property - even if that is more than half a hectare. It is likely that you will need to negotiate the extent of the "permitted area" with the district valuer. The size and character of the house is taken into account.

In a straightforward case, both the proceeds and the costs of the whole property will be apportioned between the permitted area and the rest, so that, in effect, these are treated as though they were two separate assets - one chargeable and the other not. Apportionments will, again, have to be negotiated with the district valuer.

Matters of this kind are never simple and I suggest that you consult a professional adviser to negotiate with the Inland Revenue on your behalf.

When l bought a house in 1987, my late mother contributed 15 per cent of the purchase price. The agreement was that in lieu of any interest payment, she required a quasi-equity interest, i.e., the entitlement to 15 per cent of the net proceeds of sale. I recently sold part of the property (outbuildings with planning permission) and paid the trustees of my late mother's estate an amount equal to 15 per cent of the net proceeds. Does the trust fund have any liability to Capital Gains Tax (CGT); if so , how would it be calculated?

Maggie Fleming writes:

I assume that the arrangement between you and your late mother was legally noted and that the market value of her 15 per cent interest in the property at the date of her death was included in her estate for probate. If so, the trustees will be liable to Capital Gains Tax on the difference between the sale price of your mother's share (less expenses) and the probate value; i.e., the increase in value of the property between the date of her death and the date of disposal. An annual exemption is also available - for trusts this is £3,850 in the current tax year, half the individual’s allowance, while personal representatives administering an estate can claim the full £7,700 for the year of death and the following two years.

You do not mention your own Capital Gains Tax position on the sale of the outbuildings. The sale of outbuildings with planning permission is a somewhat grey area but you clearly owned them for a number of years prior to sale. Depending on their nature and the use to which they were previously put, it may be possible to claim at least some measure of principal private residence relief on their disposal.

My two sons have just bought a house together, each paying half the mortgage. The older son lives in it permanently, the other is in HM Forces so is not there regularly. They want to let two rooms to make the property "work" for them, for a few years, sharing the income. What is the most tax-effective way of doing this? Can each son declare just the income from one room? Can the "Rent a Room" scheme be used to advantage here? If the younger son were to be posted abroad for, say; two years and his room is also let, what are the implications there? Are there any pitfalls they (or we) should be looking out for?

Maggie Fleming writes:

Assuming that both your sons qualify (see below), they can choose either to come within the Rent a Room scheme, in which case the first £4,250 of rents will be tax-free, or to have the profit computed in the normal way – i.e., rents less expenses. If total rents are no more than £4,250 pa, they should opt for Rent a Room. The £4,250 limit will be split equally between them. If rents are more than this, the decision will depend on the expenses. If they stay within the scheme, any excess income over the limit will be taxed in full, with no deductions for expenses. Therefore, if expenses are high and profit low they may be better off outside the Rent a Room scheme.

They can change the tax treatment from year to year and have 22 months after the end of the tax year to decide how they want a particular year treated. They can therefore work out the tax liability using both methods and decide which is to their advantage.

It is possible that your younger son may not be able to use Rent a Room, as it applies only where the property is the landlord’s main residence in the year – he will need to check with his tax district. If he goes abroad for a lengthy period, it is unlikely to apply, although, if he were within the scheme prior to departure during a tax year, he would be allowed to remain in the scheme for the whole of that tax year. Your other son can use it, however, but relief will be restricted to £2,125.