Capital Gains Tax Mess

[moneymoneymoneyitsarichmansworld]

Name changed for this.
Bear with me, don't want to drip feed...
We bought a house, many years ago, at a nice price. Eventually wanted to move to a different part of the country but struggled to sell, so got a btl mortgage and rented old house out. At new house ten years, decided to try to sell old house but wanted to sell to tenants who asked for a couple more years; took a further borrowing on old house to put deposit down on a new btl mortgage for another property to rent out.

Have finally managed to sell old house, for a large profit except we used some of that already - to buy our home, and to reinvest in new rented house.

We thought that most of the profit in the house is not subject to cgt because we a) bought our new home and b) reinvested some already, and c) plan to use any left over to further invest in a btl. It's supposed to be our pension as we struggled earlier in life and haven't got much of one.

Could anyone with financial knowledge please help me understand what we have to pay on? And is it possible/better to start a limited company now? My OH works self employed as the landlord. Thank you

If you've sold you will have crystallised the capital gain, the same happens if you transfer ownership into another name - like a limited company. I'm not an expert but we are looking into transferring a property into a Ltd company at the moment. I think you can offset some costs against the capital gain, but not buying other properties etc.

Very broadly you pay cgt on the gain (excluding certain costs and with a small amount of relief) to the extent it hasn't been your main residence. It was your main residence for a while so some gain will be exempt. It's broadly a straight line calculation I believe ie you own it for ten years and it is your main residence for five then the taxable gain is divided into ten and half is tax free and half is taxable. Lots of nuance though and I am no accountant (which you will need)

Thanks for the swift responses! Sorry @cathyandclare can I ask what crystallising the gain means?

Yes @plumfy I'm feeling we will need an accountant/financial advisor; was hoping it would be more straightforward!
Thanks again, really appreciate it.

It just means that you've sold the property and finalised the capital gain IYSWIM. If you haven't completed on the sale/ transfer of ownership yet, then the capital gain is not yet made.

@plumfy sorry so if it was 20 years in total, we lived there 10 and rented it 10 is that still half and half? (I mean, it's probably a duh moment but, well, y'know) x

Not put to me but crystallising the gain I would say means that even though you are not receiving any money for the transfer the gain is deemed to arise and you pay tax on it even though you don't get any money - although I think you can holdover the gain (or defer it) on some types of assets (but can't remember at all how those rules work). Also SDLT arises on a transfer to a company

@cathyandclare ah ok! No it's not finalised yet. So can we set up a LTD company in readiness?

Yes that was what I meant - but I am no expert this is just gleaned from various things over the years!

Thank you so much, both; you're helping me not panic quite so much... will also definitely consult don't worry x

Instead of transferring the house ownership to a Ltd company, you could pay your DH to manage it. He can earn £12+k without paying tax.

But here you have been running it as a business although not in a company so I think there are different things you can do. Ask an accountant - worth it to reduce your tax and also to create a plan for the future if you are going to keep doing it as a business!

AFAIK the only way to have avoided this is to move back into the old house and sell your present house. I know somebody who did this but it was a number of years ago. Everyone does have an annual allowance for capital gains but it isn't much. You can back date it for two years I think. And split the gain between you if its jointly owned, but you do need an accountant, any money spent on impovements can be offset.

We're looking into it- but if we transfer the property into a company we still have to pay tax on the gain at the time of transfer. So no real benefit at the moment, although may be worthwhile if CGT goes up to 40% as is speculated.

Like you, we've borrowed against the property. To complicate matters, if we transfer into a limited company we have to move the BTL mortgage into a commercial one which won't be anywhere near as low interest as the current one.

There is a calculator on HMRC and guidance as to what reliefs you can claim based on how long you lived there and how long tenants were. The gain arises though on transfer to the limited company.

You may crystallise the gain in transferring the house into the limited company. You should speak to an accountant to help with your tax planning, I think it will be a case of mitigating the gain rather than having no gain now - I.e. you will end up with some tax liability

https://www.gov.uk/tax-sell-property/work-out-your-gain

You get some relief for the period in which you lived there and can offset your costs too.

Transferring into a company won’t help your tax liability. People generally do that with rentals because it’s more tax efficient. But it won’t help you here.

20 years is 240 months.
You lived there for 10 years (120 months) + 9 months private property relief.
Tax due 129/240 x (gain - some allowed expenses)
Did you sell this year and you owned the house jointly?
If so, you have£12.3k each allowance.
The figure left after allowing for allowance is either taxed at 18% or 28%

https://www.gov.uk/capital-gains-tax/rates

Please get professional advice, you will owe capital gains tax, it doesn’t roll over and a limited company won’t help you - you also need to file a CGT 60 day form when you sell and pay the tax owed

Thank you for your help guys, much appreciated

This is correct.

I think you’re complicating matters thinking

most of the profit in the house is not subject to cgt because we a) bought our new home
irrelevant
and b) reinvested some already,
irrelevant* *
and c) plan to use any left over to further invest in a btl.
Irrelevant, I think - although get advice.

As I understand it (having sold a property that was once our only home and then we let it out), the CGT is due when you sell regardless of what you do next.

It’s likely not as bad as you think though - use the calculations as above.

In a slightly similar position but I don't really follow the calculation above (my fault entirely I'm sure).

We have owned house no.1 for 30 years.
We bought house no.2 and moved into it 3 years ago. We haven't sold house no.1 as family are living in it.

We will want to sell house no.1 in a few years. Am I right in thinking that we will, at that point, pay CGT on the increase in value from the point at which it ceased to be our primary residence?

Am I right in thinking that we will, at that point, pay CGT on the increase in value from the point at which it ceased to be our primary residence?

Not quite.

The CGT calculation is from original purchase price to selling price. So the price you paid 30 years ago, and the price it sells for - the difference between them is what it’s calculated on.

Then you get an allowance for all the years you lived there, plus an ‘extra’ 9 months. Those months are free, effectively, so knocked off what you’ll pay.

Then when you’ve worked out your gain, you can also have £12,300 per person free. So if you own it 50-50 with another person you’d have £24,600 off the total gain.

Worth remembering that CGT halves from 6th April 2023 after the budget. So £6k instead of £12k. Then halves again the next tax year!

It is on the rate as at exchange not completion