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

I gather the house is sold.

If it is, you have crystallised the gain and its too late to do any planning. There isn't any rollover relief on sales of residential property.

Gains on residential property have to be reported to HMRC within 60 days of completion and tax paid at same time.

See an accountant now and find out your tax position and get the report filed . At that point, if you will struggle to afford the tax then speak to HMRC to try and negotiate a payment plan. But don't delay reporting the gain.

You can then ask the accountant for advice going forward and to ensure you've reported the incomes correctly etc

Not sure how him working self employed as the landlord helps at all due to how BTL is taxed these days? Is the rented property in his sole name?

Explain how that helps?

I've recently paid CGT on inherited property, I employed an accountant as I thought it was more complicated than it was. They just told me what to put into the government website but actually it's pretty self explanatory and tells you how much to pay at the end. It was, however, I think worth the £300 bill from the accountant for their advice. You're allowed to take off estate agents/solicitors bills as costs and there is a tax free allowance (which is going down by about half in new tax year so if already sold makes sense to pay quickly) 👍

Thank you for that @NoSquirrels.

So, simplifying the figures -
House bought for £80k 30 years ago
Lived in for 25 years
Sell now for £500k

CGT is calculated on £420k minus 2x allowances = £396k. I know I'm being dim, but I don't understand how the discounted years are then applied, and therefore how much CGT we would pay if we sold now 🤷‍♀️

Here’s the calculator: https://www.gov.uk/tax-sell-property/work-out-your-gain

Here’s an example from HMRC on how the private residence relief works:

Example 5You bought your house in February 1981 and lived in it as your only home until March 1995. You then moved to a new house which became your main home but retained the first house as a second home. It was not let. You sold the first house in March 2022.You are entitled to relief for the period when it was your only home (counting from 31 March 1982), from March 1982 to March 1995, 156 months, plus the final 9 months of ownership, a total of 165 months. The period of ownership from 31 March 1982 to March 2022 is 480 months. The relief is 165÷480 months.

So, in your case, you owned the house for 30 years = 360 months.

You lived in it for 25 years = 300 months.

So you get 300 months + 9 months extra.

That’s 309 divided by 360 months. That’s your PRR entitlement.

Put that in the calculator linked above.

@NoSquirrels - thanks. I think I've got it now! I did a rough calculation and the outcome didn't look too bad. Not sure if the fact that we have a hefty mortgage on House No.1 (to help pay for House No.2) will have any bearing. Or the fact that DH bought on his own initially and I moved in a few years later. I've also realised that his pension rise this year will nudge him into the higher tax bracket so we will have to pay the higher rate of CGT when we sell. We'll definitely get professional advice though when we do come to sell.

But at least I can stop panicking that we will owe massive amounts! Thanks again.

Mortgages have no bearing on your capital gains.

You take allowances off at the end

My advice is take advice.

They can help you plan as well

@Moveforward

Gains on residential property have to be reported to HMRC within 60 days of completion and tax paid at same time.

There is a kind of loophole in that if you can complete and submit the 22/23 SA return with the CGT declaration on it within 60 days of sale, you don't need to do the online return and the CGT is payable on the usual CGT date of 31 January 2024!

Yeah, try getting all those ducks to line up!

Hard enough to get SA return info in for summer filing lol!

But it might be worth busting a gut for if there's an issue paying the tax as it gives a bit longer to save or even to earn interest now! Blimey....how things change quickly! I still remember the 30.day return!

The property isn't owned by a ltd company though, so that is irrelevant here. And even if you could set up a company and transfer it in before completion of your actual sale, the transfer into the Ltd company will be at market value and cgt will be payable on that transfer - so no tax saving.

If it's owned jointly and the sale completed before 5 April then you will each have 12,300 to offset against the gain. If after 5 April then it's reduced to 6k each. As it's residential property the gain will have to be reported and the tax paid within 60 days of completion.

You will get principal private residence relief for the time you actually lived in it and also for last 9 months of ownership.

You could file a return with as much accurate information as possible, and estimates for information you don't have, then submit a revised return online later in the year when you've everything. Same effect.

I've seen enquiries into returns submitted like that. OK outcome but hassle and client worry.

Coming on to add, it's not worth setting up a company to hold a property.

Stamp duty is more in the first place then when you eventually sell the property the company pays CGT at corporation tax rates (19-25%). If you then want to take the residual amount out of the company you'd have to either close it down and pay CGT personally at 20% or take it as dividends.

Either way you end up paying 2 lots of tax.

If the property is worth over £500,000 then the company has an annual tax charge called ATED payable too.

In terms of selling the current property, I'd recommend using HMRC's website calculator or take advice from an accountant.

Bottom line is you're making profits on the sale of a property you haven't lived in permanently so you'll have to pay CGT at either 18% or 28%, depending on whether you're a basic rate or higher rate taxpayer.

You have to report the capital gain and pay and tax within 60 days of completion.

Re Company, if you market it for rent or rent it out during the ATED period you get 100% tax relief.

Stamp Duty; Anyone buying a second home pays a surcharge on stamp duty

I’m not an accountant it’s just what I red.

I have no idea why people wade inti these threads who are not qualified to give advice, so come on and give incorrect advice based on something they read on the internet

OP pay an accountant to help

There is a flow chart here that you might find useful

https://zebraaccountants.com/reporting-capital-gains-tax/

We paid an accountant to calculate it for us. We jointly owned the property so 2 separate capital gains were submitted. It was our prior residence so we could deduct time we lived there against the time rented out and could also deduct any costs spent on the property like home improvements and legal costs of buying and selling. Once we factored in the personal allowance we didn't owe any capital gains so for us it was well worth getting the accountant to look into.

OP, get an accountant to handle this for you. They'll charge £300-ish but they will save you more. They will be aware of legal ways of reducing what you owe. I was in a similar position to you: bought a property in the late 90s, was offered a 2-year-contract job elsewhere a few years later, rented my home out and never moved back in again. Sold last year to my tenants and had to swallow the CGT bill. But my accountant was able to reduce the amount I owed by a couple of thousand and at least I had the security of knowing that I wasn't going to make a mistake and have HMRC come after me. You have to move quickly once you've sold — 60 days. If you don't sell by 5 April your CGT Allowance will be reduced from £12,300 to just £6000. This is why so many landlords have got out of the property business in the last few months.