Caught out by changes to Capital Gains Tax

[jpkeates]

Thank you for taking the time to update the forum.
And well done for sorting everything out!

[reluctantlandlord1976]

I just wanted to update the thread in case it assists anyone else with a similar issue. Many thanks first of all to everyone who responded, especially JPKeates, AndrewDodd and Gordon999. I did have an initial telephone meeting with an accountant and provided him with the key dates/information who actually gave me incorrect advice [said I didn't need to calculate my liability on the different periods of ownership percentage!] so I was glad I decided to approach HMRC direct and sort it out. I'm very grateful to this forum whose members explained the necessity to calculate the CGT based on the different dates of ownership given this was a joint tenancy with my parents; this option is not available on the HMRC online CGT calculator. Once I did this and deducted the allowances my CGT liability was nil. Also HMRC confirmed [thank you lllccc] that as I wasn't registered for SA and had no CGT liability there was no need for me to formally notify HMRC. I've obviously kept the spreadsheet with the information on for future reference as this has given me no end of sleepless nights. It would be better if the HMRC online calculator could be tweaked to allow for different variations and also to push through the calculations even if there's no CGT to pay - just for everyone's records but I guess they've got enough on now writing off the covid payment fraud. Link below.
https://www.thetimes.co.uk/article/t...raud-dfkxt5fr7

As an aside - as I had previously been registered for SA [but not for last two years] as a landlord and in conversation with HMRC they decreed I owed £1.75 in unpaid tax dating back a couple of years [even though my only income was my paid employment and I was taxed via PAYE] and went to the trouble of writing me a letter and sending me a bill. I obviously paid it straight away and I'm not sure why it wasn't adjusted via my PAYE but I do wonder why they don't go after the big boys?

This has all been a big headache -the only consolation I can take is that by buying the house with my parents back in the 1980s my parents didn't have to move out of the council house they'd lived in for 30+ years and I was able to make improvements to the property for them. I would never be a landlord again - the tenants we had were not decent, perhaps we were unlucky? They thought nothing of posting on FB their attendance at various events/stag dos [abroad] while simultaneously claiming they couldn't afford their rent that month! No wonder when we rented back in the day we got letters of thanks from our landlords for leaving the property in good condition. I assumed everyone would do the same! It's over now - good luck to you all. Many thanks again to everyone who helped.

[lllccc]

You have to make the return to tell HMRC there is no tax to pay, if that's the case.
There is no option not to tell HMRC.

I don't think that's right
https://www.litrg.org.uk/latest-news...get-caught-out

For non-residents, yes that's absolutely correct, for residents who don't normally complete SA it's different if there's no tax to pay. When I sold a property back in the days when I didn't do an SA I never did the return, and never told HMRC as I was within my allowance. At the time I took a screenshot of the HMRC page explaining this and included it in my records just in case.

[jpkeates]

[QUOTE=reluctantlandlord1976;n1179294]Thanks Gordon for explaining all this. Is the 26 years self use period still applicable as the property was only my principal residence from 1982-1992? If it's for the period when we were all in residence then that's better! I thought I had it sorted using the Gov.uk calculator previously but it /QUOTE]Each person has their own liability and own PRR.
If you owned some or all of the property between 1992 and 2007 and didn't live there, you'll be liable for the proportion of the gain for that period that equals the proportion of your ownership.

[reluctantlandlord1976]

I think Andrew is correct .

You start with 1/3 interest ( in 1982 valued at £6500 ? ) plus 1/6 interest from parent1 ( valued at £20K ?) plus 1/2 interest from parent 2 ( valued at £60K ? ). This probably takes your total entry cost to around £40K.

Your total capital gain is roughly £80K.- £40K = £40K which is apportioned between 1982-2007 ( self use period .) and 2007-2021 ( rental period..

You can claim exemption on 26 years for self use period . So liable to pay tax on 13 years gain during rental period = £14K .

After deducting the capital gains personal allowance of £12,300, you probably pay 18% tax on £1,700.

Thanks Gordon for explaining all this. Is the 26 years self use period still applicable as the property was only my principal residence from 1982-1992? If it's for the period when we were all in residence then that's better! I thought I had it sorted using the Gov.uk calculator previously but it doesn't cater for all the variables. With everyone's help I've sent a summary to the accountant for advice. Will post follow-up in case it helps others in the future. Thank you

[jpkeates]

as I haven't been required to complete a SA last year or this year and only income is from employment then there is no need for me to report the sale as no CGT to pay?

You have to make the return to tell HMRC there is no tax to pay, if that's the case.
There is no option not to tell HMRC.

[Gordon999]

I think Andrew is correct .

You start with 1/3 interest ( in 1982 valued at £6500 ? ) plus 1/6 interest from parent1 ( valued at £20K ?) plus 1/2 interest from parent 2 ( valued at £60K ? ). This probably takes your total entry cost to around £40K.

Your total capital gain is roughly £80K.- £40K = £40K which is apportioned between 1982-2007 ( self use period .) and 2007-2021 ( rental period..

You can claim exemption on 26 years for self use period . So liable to pay tax on 13 years gain during rental period = £14K .

After deducting the capital gains personal allowance of £12,300, you probably pay 18% tax on £1,700.

[reluctantlandlord1976]

Hi Andrew
First of all I've got an initial appointment to speak to an accountant on Friday!

Can I just check where you write ' ...at death 1/6th of the value of the whole would have been deemed to pass to you for CGT purposes as the survivors would share the whole'.

Does this mean 1/6th of the value of the whole as in the sale price of the house this year, i.e £80k?
1/6 of £80k is £13,333k is therefore the CGT figure?
Of which I can deduct the solicitor fees etc. and cost of any improvements to facilitate the rental?
If so then I don't owe any CGT when I take into account the £12,500 allowance which was my original assessment prior to the changes in 2020 and as I haven't been required to complete a SA last year or this year and only income is from employment then there is no need for me to report the sale as no CGT to pay?
Or have I got this completely wrong and need to go for a lie down or a stiff drink? And I need to do some calculations for the three periods referenced.

Thank you.

[jpkeates]

Even if probate wasn't mandatory, it would probably have been useful.

[AndrewDod]

Yes this would be the case if it was jointly owned (not as tenants in common). The situation would be that at death 1/6th of the value of the whole would have been deemed to pass to you (for CGT purposes), as the survivors would share the whole.

So for the 3 periods you would be taken to own

33.333% 50% 100%

[reluctantlandlord1976]

jpkeates
There was no estate as such, property jointly owned - they were both retired at time of purchase living on small pensions, hence I bought with them so they could stay in the home they'd been renting from council from early 1950s to March 1982 at time of purchase. And I paid for the initial improvements to make life more comfortable for them, I was the youngest of children with no ties/mortgage at the time so could afford to buy with them. 10 yr mortgage only. Parent 1 had savings in 100s only. Parent 2 had more savings but these went to pay care home fees. The extract below sums up the situation. We didn't need probate so that Parent 1's minimal savings could be transferred to Parent 2's account. Parent 2 - all their pension etc. went towards care home fees, died intestate, no probate. Check if probate is needed

Contact the financial organisations the person who died used (for example, their bank and mortgage company) to find out if you’ll need probate to get access to their assets. Every organisation has its own rules.

You may not need probate if the person who died:

• had jointly owned land, property, shares or money - these will automatically pass to the surviving owners
• only had savings

[jpkeates]

I don't know the historic thresholds, but it's bizarre that there's no probate for both of your parents, their estate has to be tiny for that to be possible nowadays.
It's probably too late for HMRC to do anything about that, but that process sets the values for CGT calculations later on, so it's another complication.

Part of the purpose of Probate is to provide the background information that you need now, and to report to HMRC the end of your parent's CGT liability.

[reluctantlandlord1976]

Morning Andrew
Thanks for your response early this morning and clarifying I have to make three separate calculations [the split wasn't clear on the CGT calculator].
I understand the query on the value but this is an ex council house on a council estate [I feel I have to defend it here as 'council estate' gets a bad press but this was a nice estate built in early 1950s, well kept [doorsteps scrubbed etc.] where occupants were grateful to have a council house [mining village] and I obtained these figures from the Land Registry sold prices in the same street.
The uplift of just £20k over 15 years is correct from 2007 to 2021.
In 2005 the prices were actually higher but then in 2007 there appeared to be a slump in prices.
I extended my search on the LR Open Data for sold prices in wider area and with a couple of notable exceptions [where the houses have had additional bedrooms/loft extensions added] the average uplift for this period is indeed c£20-£25k. Some properties decreased in value or made only a marginal increase, i.e 2006 to 2012 £1k increase/2009-2014 £5k increase/2000-2014 £19k increase/1995-2005 £10k increase.

When I worked out my dues in 2019/2020 when trying to sell [the council had released some new accommodation hence to decrease in demand for rent/sale] I didn't owe any CGT due to lettings relief etc. I'll redo my calculations now based on the three separate periods and take the figures to an accountant for advice.
Thanks again

[AndrewDod]

As gordon indicates you need to consider it in three entirely separate parts, each have their own gain and calculation --

The part YOU owned before Death 1
The part YOU owned between Death 1 and Death 2
The part you owned after Death 2

Based on the values you give you are unlikely to have to pay tax on this (my previous comments noted) but was it really the case that the whole property which was valued at £60K in 2007 only sold for £80K 15 years later. That sounds a tad odd.

[reluctantlandlord1976]

It seems to me your capital gains tax problem is rather complex and requires some help from a tax accountant. But before contacting the tax accountant , you need to collect all of the information.

(a) Your "total capital gain" = your property sale proceeds ( Jan 2021) minus your 3 part "entry cost".

(b) Your 3 part "entry cost" for the property = .1/3rd of cost ( at April 1982 ) + 1/3 rd valuation ( first probate ) + 1/3 rd Valuation( second probate ) plus improvement costs. .

(c) The "April 1982 valuation" should be provided by a local surveyor or local estate agent.

(d) The "total capital gain" is apportioned between the "rental period" and the "self-use period" ( your stay plus parents stay )

Thank you Gordon, didn't see your response this afternoon. I will look at this with fresh eyes tomorrow as it's late now.
I've put some figures in my reply to a post just now but answers below to your questions.

a] £80k Jan 2021 sale price.
b] As property purchased before 31.03.82 I understood it's the market value at this date and not the price paid? So £20k. If that's not correct then it would be £6,500-ish
There was no probate at time of Parent 1's death so no market valuation.
There was no probate at time of Parent 2's death so no market valuation.
c] Market value in 2007 at time of Parent 2's death - £60k [I've taken the sold prices from similar properties on same street in 2007] but can obtain valuation from local surveyor/estate agent.
d] Total capital gain. Do I take this from 2007 market value to 2021 date of sale? If so that would be £20k under first scenario and £33k-ish under second scenario.

10 year period when property was my only residence so can claim PRR, also improvement costs.

I definitely need an accountant to sort this out .