Capital gains tax

[yerbamate]

I have owned a house for 11 years which my father has lived in rent free. If I sell, how will this affect what I will pay in CGT. Any imput gratefully received.

[kags]

The Capital Gain is worked out as the sale proceeds less the cost, minus the costs of purchase and sale and any costs of improvements made to the property. The Gain is then reduced by a Taper Relief, which for a period of ownership of more than 10 complete years is 40%. You then have an annual exemption of �8800, and any remaining gain is taxed as the top slice of your income for the year.
There used to be an exemption from Capital Gains for properties provided to dependent relatives, but it was abolished many years ago.
If you have lived in the property yourself at any point, then the proportion of the gain applying to this period, plus the last 36 months of ownership, will be exempt from tax.

[yerbamate]

Thank you so much kags, especially answering in plain english.

[matchmade]

HM Revenue and Customs will see this property as an investment; your father's occupation of the house and the lack of rent paid are irrelevant. You will pay CGT on the difference between the sale and purchase price, less your legal and agency costs, stamp duty, and any repairs and improvements you can prove you have made in the eleven years (e.g. new boiler). You can also reduce the amount liable for tax using the old "indexation" (inflation proofing) tax relief, for the period up to April 1998. There are tables to work this out online � see dyerpartnership.com/capgain.html#indexation.

For the period after April 1998, the new "taper relief" system reduces your chargeable gains still further by 5% for every complete year, with an extra year because your purchase occurred before April 1998. You will therefore get nine years of taper relief, which means a 45% reduction in your chargeable gain. You also get an annual CGT allowance which is something like �8400 before you pay tax.

So, some sample figures:
Original purchase price �80,000
Sale price �240,000
Costs incurred for sale and purchase: �6,000
Maintenance costs: �6,000
So net chargeable gain = �148,000

Reliefs:
Indexation - 3 years from April 1995 - 98 = 9.1%
Taper relief - 8+1 years = 45%
So chargeable gain after reliefs = �67,932

Tax allowance = �8,800

So you would pay CGT at 40% on just under �60K, which is about �24,000.

[matchmade]

Forgot t osay:

As kags says, he best way to reduce CGT further would to be able to show to HMRC that you lived in the property at some point for not less than three months, starting not long after you purchased the house. You would claim that the house was your Principal Private Residence for that period, after which your father took residence and you returned to your main address. You would then not have to pay CGT on this period or (best thing) the final three years (2004-06), and you would still get taper relief on the intervening period usign the figures I've outlined.

[yerbamate]

What brilliant advice matchmade. I did indeed live there for three & a half years initially. Thank you so much, I had`nt known where to turn.

[kags]

Potentially, any property that was at some point poccupied as a main residence , then let out as "residential accommodation", could also attract Lettings Relief of the equivalent of the Private Residence Relief, or �40,000 if lower. In this case there was no rent paid, but I am not sure if this would mean no lettings relief could be due. The legislation certainly doesn't provide against a case such as yours, but there could well be some anti-avoidance provision somewhere. I instinctively feel the relief will not be allowed, but I wonder what matchmade thinks about this?