Tax Questions and Answers
When we last moved we were unable to sell the family home, and so have rented it out for
some years. With the improving housing market locally, we hope to sell in the near future. Will we face a tax bill on the sale?
The general rule when selling an asset is that any gain made on the sale falls subject to capital gains tax (CGT). CGT is due on gains above the annual exemption for CGT in any given tax year. This is currently £11,700 per person. If an asset is owned by more than one person, the gain is split between them, and each gets their own exempt amount.
However, there is a relief specific to property that was occupied as your own home known as Principal Private Residence (PPR). Any gain from a period when a property is your home is exempt from CGT. This is to prevent people who are simply moving house from being subject to an unexpected tax bill. As it is sometimes necessary to move prior to being able to sell your home, the last 18 months of ownership are treated as “deemed occupation” for any property that has been your home at some point. In some cases where you are absent from your property, but it is still your home (e.g. you are working abroad in employer-provided accommodation), then those periods also count as occupation for this relief.
Where a property has only been your home for part of your period of ownership, the amount of the gain that is exempt is calculated using the following formula:
Total gain x (period of occupation including “deemed occupation”/total period of ownership)
Because you have also rented out your property, you may also be eligible for Lettings Relief. The initial calculation for this is the same as for PPR, substituting period let for period of occupation. Where there is an overlap, PPR relief takes precedence. For example, if you had only let your home for the last 18 months of ownership (the period of “deemed occupation”) then no Lettings Relief would be available. Gains that qualify for lettings relief are also exempt from CGT.
The maximum gain eligible for lettings relief is the lowest of:
• The amount of gain attributable to the period the property was let (as calculated above)
• The amount of gain that is eligible to PPR relief
Lettings relief cannot create a loss, but it can reduce a gain to zero.
Any taxable gain on this property would be subject to the higher rates of capital gains tax of 18% and 28% because it is residential property.
My son has just got married, but he and his wife are struggling to find a property to live in.
I have a property that I could sell to them for less than market value to help them out. Would doing this create any tax implications?
Normally the gain on sale of asset would be determined by the actual sale price compared to the cost. However, this does not apply when the sale is to a “connected person”. A list of individuals and entities that qualify as connected persons can be found here (tinyurl.com/ycfcnwun). As you will see, this includes close relatives and their spouses, so both your son and his wife fall within this definition.
Any transactions between connected persons are treated as taking place at market value for capital gains tax purposes, regardless of what is actually paid. Depending on the actual sales price, this could potentially leave you with a tax bill higher than the amount you are receiving.
On the assumption that the building in question is residential property, any gain above the personal allowance (see above) will be taxed at 18% or 28% depending on other income and gains.
Assuming you are married yourself, there is potential for reducing the gain. Transfers between husband and wife are treated as no gain or loss, so you could transfer a proportion of the property to your spouse without tax consequences. The subsequent market value gain on the sale to your son would then be split between you. This would allow you two exempt amounts to offset against the gain, and potentially keep the gain outside higher rates. However, if your spouse has other income, you should take professional advice to ensure you are not actually increasing the CGT due.
You should note that you will lose control over the property subsequent to the sale. Even if
you sell it solely to your son to keep it in your own family, he will be able to transfer part ownership to his wife post-sale without any tax consequences (as detailed above). You should take legal advice from a conveyancer before you consider any transaction involving property.
We hope you have enjoyed reading this article from Hastings Independent. The future of this volunteer led, non-profit publication would be far more secure with the aid of a small donation. It only takes a minute and we would be very grateful.