Tricky CGT calculation

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    Tricky CGT calculation

    Some hints appreciated here as several elements of complexity:

    a) Property bought in 1980 by two individuals (Me and a person who is not my spouse) in 50:50 share.
    b) In 1988 I lived in property as my PPR for only one year.
    c) The property has been tenanted for all other years.
    d) In 1998 my co-owner died and I inherited the remaining 50%
    e) In the tax year ending 2013 I gifted 20% of the property to my daughter (formally, via a solicitor).

    I am aware that CGT will be payable on this gift. It is reasonably easy to assign a market value to the gift because
    three identical properties in the same block were sold on the open market at the same time.

    Several calculation issues are raised by the scenario (feel free to take a stab at only one aspect!).

    i) Given the minimal period of PPR would HMRC likely object to the application of PPR relief (3 years for this tax year).

    ii) If not, I assume PPR lettings relief (and also the direct deduction due to PPR) would only apply to 50% since I was
    owner of only 50% during the period of PPR?

    iii) Since acquisition was in two parts I could either use a first-in first out basis, or calculate a total acquisition cost.
    I assume the latter?

    iv) Could it be reasonably argued that 20% is worth less than 20% of the whole given the reduced value of a minority share, and reduce the
    market value accordingly.

    v) Although I did genuinely live in the property as my PPR for one year, is this likely to be challenged. I can show receipts for the
    removal firms giving the property address, various professional registrations at the address, and that I had no other address.
    How can one ever prove such a thing definitively 25 years down the line since there is no requirement to register a
    PPR if one owns only one property?

    vi) If I were to die within 7 years would the CGT paid be refunded to my estate - otherwise it seems anomalous that
    both CGT and IHT would be payable on the same asset.

    To put some numbers to this (and ignoring other capital costs which are relatively minor), take:
    - initial acquisition cost of the whole as £40,000
    - valuation of the whole declared at probate as 120,000 (transfer 60,000)
    - market value of the whole at time of recent transfer 500,000

    It may be easier to calculate by considering each half as a separate property such that

    1H has been owned from 1980 to 2013 ( including 1 years residence , PPR allowed = 4 years out of 33 years. ) Lets say capital gain = 250K x 0.9 (discount for transfer of part share ) minus 20K orig cost = 205K.
    Gain during PPR = 4 x 205 /33 = 25K approx.
    Gain during letting = 205K -25K =180K approx.
    Less 40K lettings relief = 140K Gain x 40% transferred to daughter = 56K .
    Less CGT Allowance = 10,900
    Taxable gain = 56K-10.9K = 40.1K which is taxable at your rate @20% or 40% .


      Many thanks Gordon - hugely useful, and this would simplify things

      - I wasn't sure HMRC would allow this (a First in First out approach)
      Certainly for stocks and shares they insist on FIFO if the sale is within 30 days of purchase, but after that one has to pool to create a single asset which is then part-sold. I could not find a published rule relating to any other class of asset.

      - Is the 10% reduction for a minority the general rule that is accepted, or is it documented guidance? Obviously that would become the base cost for the recipient.

      Many thanks for your expert response above


        I suggest you get an accountant to complete your tax return as I don't know if the FIFO calculation method for your situation , would be accepted by hmrc without challenge .

        To get the 10% discount , you would need a RICS surveyor to make statement for the market value of the property at date of transfer AND to state the discount for partial transfer.


          Some brief initial thoughts :

          1. You will need a valuation at 31 March 1982 - this is the relevant date for acquisition. I have assumed £40,000, but it might be significantly more.
          2. Ignoring fees and discount, the disposal value is £100,000 (20% x £500,000).
          3. The relevant acquisition cost is £16,000 (50% x £40,000 + 50% x £120,000 @20%).
          4. Gross Gain is £84,000 (£100,000 - £16,000).
          5. Assuming PPR relief is available, it is ~ £11,000 (£84,000 x 4/31).
          6. LR is £11,000 (restricted to max of PPR).
          7. Net Gain is £62,000 (£84,000 - £11,000 - £11,000)
          8. Annual Exemption Allowance for 2012-13 is £10,600.
          9. Taxable Gain is £51,400 (£62,000 - £10,600).
          10. CGT rates for 2012-13 are 18% and 28% (not the Income tax rates of 20%/40%/45%).

          CGT will not be refunded for death within 7 years.

          I assume there were reason(s) why the gift was not split over several tax years?

          Why was the CGT calculation not done before the gift was made? Or did you not realise a gift can be subject to IHT and CGT?

          I would recommend engaging a professional Valuer - the tax saving could be more than his/her fee.


            Originally posted by King_Maker View Post
            Some brief initial thoughts :
            Why was the CGT calculation not done before the gift was made? Or did you not realise a gift can be subject to IHT and CGT?
            Many thanks again, particularly for the sample calculations. Not really unaware re above. Reasonably fully aware -- it's a trade-off between estimated longevity, higher rate versus lower rate tax on rental income, IHT vs CGT, and projected inability to look after my rentals. Splitting over many many tax years to completely avoid CGT is virtually impossible (or would take 20 years or so even assuming I have no other gains on shares etc).

            Happy to pay my fair share of tax in-as-much as legalised theft is ever fair -- and bearing in mind to what inappropriate purposes tax revenues are applied (and to whom they are donated).... CGT is already just about the most unfair tax of all in that it does not often represent any form of real gain, so applying both CGT and IHT to the same asset seems iniquitous. If I sold the house I could still do with the proceeds exactly what I could do 25 years ago -- buy a similar house.

            I say this as the builder on a house in our road is pretending that he is living in a property he has just built (well he sort of lives there), and will then presumably sell it in a year or two writing off his entire business profit against CGT on his PPR just as he is busy building the next one. Or the folk in the flats in a building where I own a flat who have spent the past 20 years selling their properties from one to another in an endless loop avoiding any capital gain and also making it impossible for service charge arrears to be collected without massive hassle. It's the honest folk who pay the tax.


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