Ownership / rental split and CGT

[infra-red]

Hi All,

First time post, and very similar to a recent thread on CGT (JayDs), but in an effort to not highjack someone elses thread and cause confusion I thought it best to start afresh.

My scenario is as follows - we moved from our old house in Kent to upgrade to a larger home for myself, partner and two young children about 6mnths ago. The new mortgage is Offset so the intention had been to allow us to do some work to the old house, sell and then immediately deposit the gain in the bank to offset the mortgage.

As you can guess the current property downturn (esp in Kent) means that we've struggled to sell and I'm looking at rental as an option as the rental market is booming in the area, but sales are not.

The house is owned outright and was purchased for 90K back in about '97 (currently worth ~180K or so and all in my name). I'm higher rate taxpayer and my partner currently has zero income but has savings.

From what I understand (reading other threads), we could draw up an agreement where she received the full rental income i.e. she would pay very little tax as we'd expect this to be around £800/mnth pre expenses - so that's great.

However WRT CGT, would we be better off in the long term if I sold her 50% of the house now for the market value ie £90K (I would expect HMRC to ask questions if it was sold for less than current value) in respect of her paying 18% CGT on eventual sale as opposed to 28%.

We both lived in the house for the 13 yrs or so we had it and to be honest the rental route wasn't my original intention..... but the best laid plans of mice and men and all that!

I'm thinking that if we went the rental route we're likely to either hold onto it for about 3yrs (in which case I'd guess at a sale value of £225K assuming things recover) or hold for the long term and 10yrs in which case it's anyone's guess.

Assuming the above scenario how is CGT eventually calculated on the 50:50 split and from what dates? Is it indeed worth splitting the house or should I keep in my name?

Many thanks!

[TaxationPete]

As the property is all in your name then the entire property would attact PRR and in the longer term Letting relief up to a max of £40,000. (Read HS283 on the HMRC web site ) If you gave or sold your partner say 50% then her share would not attrat PRR or any Letting Relief. The property could remain free of CGT for 5,6,7 or more years depending on what house prices do in the future. If it came to a situation where you as the sole owner had run out of CGT relief then the matter of ownrship can be addressed then.
Regards Peter

[Telometer]

You could scarcely have posted a less helpful response, could you Pete. OP wants to avoid income tax.


OP: I am assuming that you are not married to your "partner". If you are married the analysis is similar but different.

1. Transfer - by deed of trust so as to minimise paperwork - 1% of the property to your partner. Agree to share the rent in proportion - You: 1%, Partner 99%. A simple, signed dated piece of paper stating this agreement will do.

2. Your partner will thus receive the rental income (pretty much) tax free.

3. On eventual sale your partner will have a small capital gain arising from the 1% she holds which will be covered by her annual exemption (provided the profit on the house doesn't exceed £1m). Provided it is sold within three years of moving out there is no gain. As you have a further 50k of gain you can achieve tax free, you probably have another 5 years after that before CGT would be due on the sale.


(If you are married, you transfer 99% to your wife, submit Form 19 to HMRC, and then she transfers it back to you immediately prior to sale.)


Please note, you cannot offset any of your mortgage interest (secured on the new house) against rental income. Sorry.

[infra-red]

Hi - yes you're correct in that we're not married.

The idea was that she could take the total rental income from the house, but whether to do so by selling her 50% would be a better way to ALSO mitigate against CGT in the longer term.

Having looked at the CGT equation and applying the PPPR and Private Letting Relief to account for the length of time we lived there and the £40K max PLR I don't think there's much difference in it.

So do you think I need a deed of trust in order to allow her to legitimately take the income from any rental and if so does it need to be drawn up professionally?

[Telometer]

She will not get PPR or letting relief as it wasn't hers whilst she lived there. Selling a proportion of the property to her will only serve to increase your CGT bill (under current tax rules of course).

Yes (in order to give her a small proportion of the property) and yes (in order to make sure it's done correctly so as to keep you out of the taxman's claws). Couple of hundred pounds I guess.

[infra-red]

Thanks Telometer,

If I sold her the 50% share now though and we then nominate this as her main residence and move back in for a few months (which is likely as we're probably going to take the chance to have work done to the house if we're going to go this route) would this not count as principal private residence and then get the X months plus 36 months rebate and allow lettings relief to be claimed also?

Or am I missing the point and does it have to be exlcusively in her ownership?

[Telometer]

If you move in for a few months and then back to the house where you are currently living, then it never becomes her PPR so she never gets tax relief. Moreover even if she does manage to make it her PPR as she'll only have lived there for a short while then she will probably not get her full 40k of letting relief (complicated calculation).

Your own position is pretty good. If you were to sell it in 2021 for an amazing 300k, then your taxable gain will be 21k, less your annual allowance of maybe 14k by then leaves you with a tax bill of under 3k or under 1.5k if you don't pay 40% tax. Not worth worrying about. And if you do worry about it, you can transfer her enough in the previous tax year to use up your previous year's annual allowance.

[infra-red]

Brilliant - nice and simple then. Thanks for your input on clarifying that.

I guess it just leaves the question of deed of trust should we go ahead with the plan and that's probably only a 100-150 quid.

All this assuming no-one comes along and actually buys the house between now and the end of the month when I've told the estate agent that I'm bored of waiting ;-)

Thanks again for peoples input.