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Tony Tax
Tony Tax, Tax Consultant
Category: UK Tax
Satisfied Customers: 14165
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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Hello, I purchased a buy to let property jointly with my husband

Customer Question

Hello,
I purchased a buy to let property jointly with my husband May 2004,consisting of 3 self contained flats, purchased under one single freehold. Purchase price 77k. I separated from my husband in Dec 2009 and moved temporarily into one of the flats which was empty at the time. Having spent some time living in other rented accommodation, I then moved back into one of the other flats where I have been living since June 2011.
In Dec 2012, my husband agreed to transfer over his 50% into my name. We were supposed to also transfer my 50% of our marital home into his name, but he dragged his feet and this only happened in June 2013.
We are not Officially Separated and I have not taken any steps to notify HMRC that I moved to a different abode.
The thorny problem has now arisen as I am subject to a CPO. Am I allowed to claim my residence as my Principal residence? If so, will I then be subject to CGT on the 50% transfer of the marital home to my husband? as well as on my current abode?
Thanks in advance for your kind attention.
Submitted: 11 months ago.
Category: UK Tax
Expert:  Tony Tax replied 11 months ago.
Hi.

Can you confirm that the flat you are living in presently and the other two flats are the subject of the compulsory purchase order please.
Customer: replied 11 months ago.

Yes indeed


 

Expert:  Tony Tax replied 11 months ago.
Thanks for the clarification.

Leave this with me for a bit while I draft my answer.
Customer: replied 11 months ago.

I am not certain whether I qualify for lettings relief, unless I can first establish the fact that the property is indeed my principal home. The quandary is whether I will be worse off by claiming it as my Principal residence, or better to let the taxman think that the marital home is still our joint primary residence.

Expert:  Tony Tax replied 11 months ago.
I'll deal with the marital home first.

I'm not sure how a couple become officially separated but the fact is that you and your husband have been living apart since December 2009 and that's how the tax office will see it. However, the tax position may not be as grim as you think.

Take a look at HS283 for information on the main residence and CGT. The gain on the disposal of a property is treated as having accrued evenly over the whole period of ownership. That part of the gain covered by your living in the property is exempt from CGT as is the gain for the last 36 months of your ownership of it, or a share of it. So, only that part of the gain for the period December 2012 and June 2013 when you transferred your share to your husband is potentially exposed to CGT.

As far as the flats are concerned, they have both at some point been your main residence and this is based simply on the facts. I would say, therefore, that you will be able to claim both main residence relief, last 36 months of ownership relief and letting relief on each flat. These claims will not be affected by your claim for main residence relief and lats 36 months relief on your marital home.

If you look at page 4 of HS290 it would appear to suggest that as the flats are the subject of a CPO you can claim business asset rollover relief whereby you effectively delay any liability to CGT by reinvesting the disposal proceeds of the compulsory purchase in other business assets. This may not apply to the flats you have occupied yourself and I have read on other sites (here for example) that the relief doesn't apply at all to buy to lets. You might have an accountant or tax adviser look into this more closely. I will also see if I can find further clarification.

I hope this helps but let me know if you have any further questions.
Customer: replied 11 months ago.

Hi Tony,


From what I have read, I find your answer very helpful. However, it will take me a little time to look at the links and absorb the info, This is my first time on such a website so not familiar with the procedure.


A further question has just arisen in my mind. If, as you suggest, and according to the facts (apart from 2 further periods which I failed to mention earlier; namely between Easter last year till end of October & about 6 weeks this year we have lived together in the family home), If I declare the house under CPO as my main residence since Dec 2009, what would be the CGT effect of my husband's transference of 50% over to me of this property, and then in the following tax year, my transference of 50% ownership of marital home into his name? Sorry, Im struggling to get my head around each facet of the situation!


 

Expert:  Tony Tax replied 11 months ago.
Thanks.

I'll get back to you in a bit.
Customer: replied 11 months ago.

Thanks!


Are you in the States?

Customer: replied 11 months ago.

Tony,


You mentioned about the rollover relief unfortunately, however, that only applies to furnished holiday rentals, I checked it out!

Expert:  Tony Tax replied 11 months ago.
I'm not in the USA, I'm in the UK. The site is based in San Francisco I believe.

From the point that you own more than one property, you have two years to make an election for one of them to be treated as your main home for CGT purposes so you have missed the deadline for that. Where no valid election has been made, the decision as to which is your main residence for CGT purposes is based on the facts.
Customer: replied 11 months ago.

Gotcha!


I've just been going thru the whole thing. Can you help me with this last issue. From May 2004 - Dec 12, we owned the buy to let property jointly. Then from them till sale, prob Dec 2013 I will have been sole owner. Is the CGT calculated at the 50% ratio for first 8 1/2 yrs and 100% from market value at Dec 12 to sale price Dec 13??


Thanks in advance, I think I'm beginning to get the full picture, now. Presumably, as it has de facto been my primary residence for some period, I can, as you said, claim the last 3 years exempt, pro rata, as well as claim the letting relief of 40K ??


I appreciate your help so far, thank you, Tony.

Expert:  Tony Tax replied 11 months ago.
As far as the flats are concerned, your cost for CGT purposes is half the original purchase price and half the value of the properties when they were transferred to you.

You should be able to claim main residence relief and letting relief on the flats. Remember though that the last three years of ownership of a property that you have lived in are exempt from CGT and letting relief would not apply to any period of letting covered by the last three years of ownership exemption.
Customer: replied 11 months ago.

1 flat was never completed, therefore never rented out, the one i first moved into. The second flat rented out continuously from 2005 to present time. The third rented out from 2005, till June 2011, when I moved in.


I therefore assumed that in these circumstances I could not only claim 3 yrs exemption. (I plan to move to Flat 2 as soon as my tenant moves out next week, just to make sure I can claim residency over each flat). But also was thinking that I can claim £40,000 letting relief on the property as a whole. Would that be correct as far as you understand fro my explanation above?

Expert:  Tony Tax replied 11 months ago.

If a married couple separate and transfer assets between them before the end of the tax year in which they separate, they each take the other's share of the cost and purchase date as their own on a no gain.no loss basis.

If you claimed to be living together as a married couple in the two periods you referred to, then for CGT purposes, your cost of the flats would be the original purchase price if they were transferred in the tax year that you finally separated. That cost would probably be lower than the cost if you used the method I mentioned in my previous post and forgot about the "brief reconciliations".

You cannot claim £40,000 letting relief on the block as a whole. Each flat is self-contained. Your letting relief may not be as high as £40,000 per flat that you lived in and let. You would need to do the calculations. £40,000 per part owner of a property per property is the maximum letting relief that can be had.

Customer: replied 11 months ago.

Tony, you have been really helpful, but my head is spinning now. Would it be ok if I didn't sign off till tomorrow, which will give me a bit more time just to finally figure out the position. I have not come across any information as to how to calculate the letting relief portion. From what I had come across so far, I had understood it was a flat rate of 40k, so clearly I need to explore that further. Up until your latest reply, I thought I had just about sussed my position. I will give my brain a break and then figure out your last response and come back to you tomorrow. Probably in the afto as busy all morning and lunchtime. Have a great evening and thanks again!

Expert:  Tony Tax replied 11 months ago.
I have to go out for a while but I will be back later to answer any further questions.

Letting relief is the lesser of:

1 £40,000,

2 the sum of the gain for the period that the property was your main home and the gain for the last 36 months of ownership exluding overlaps and

3 the gain for the period the property was let excluding any part of the letting period which is covered by the last 36 months of ownership.
Expert:  Tony Tax replied 11 months ago.
If you let me have the following information I'll do the calculations for you when I get back:

1 The month and year you bought each of the flats you lived in and let. The apportioned cost for each flat.

2 A breakdown of their occupancy by you and tenants in terms of numbers of months including the exact periods you were living in each of the flats.

3 The value of each of the flats when your husband gave you his share. The value of the flats now or what you are receiving for them under the CPO.
Customer: replied 11 months ago.

Thanks, XXXXX XXXXX think it's simpler than you think though because it is one large property that was bought for £77k, consisting of 3 self contained flats. So I'm not sure whether you understood that to be the case or not?


 

Customer: replied 11 months ago.

Tony, I could arbitrarily say that Flat 1 was 24K; flat 2, 29k; flat 3 24k.


We carried out £15k worth of improvements, CH etc which, I understand can be offset against the final sale price.


The house was valued at the end of last year at £110k; so again, arbitrarily I could say, 35k + 40k + 35k.


The negotiated settlement has been worked out at 110 + 25% uplift; ie 137,500. In addition to that a further 14k disturbance allowance. (Which, as far as I can make out HMRC deem as part of the "consideration of sale" and therefore subject to CGT.


As I said before, Flat 1 has never been rented out, but I crashed there in Dec 09, and have been paying Council tax all the while as it has my furniture in it to date. Flat 2 has been consistently rented since 2005. Flat 3 had also been rented since 2005 up until June 2011 when I took up occupancy till now (except for the aforementioned fairly short periods).


I cant remember if I have already mentioned it, but it was purchased on May 1st 2004, for £77k. Hope that is all clear!

Expert:  Tony Tax replied 11 months ago.

Which month in 2005 was Flat 3 first let?

Customer: replied 11 months ago.

Flat 3;16.Jun-05


Flat 2; 19 - August -05

Expert:  Tony Tax replied 11 months ago.
Thanks.

Leave this with me while I do some calculations.
Customer: replied 11 months ago.

Thanks!

Expert:  Tony Tax replied 11 months ago.

Hi again.

I think the tax office will challenge any claim that one month's occupancy of Flat 1 entitles you to claim it was your main residence which would open up letting relief too.

As for Flat 3, I'm assuming that the disposal proceeds will be £48,480 (£151,500 x 32%) and that contracts will be exchanged in December 2013. The cost is £32,000 (£29,000 / 2 + £35,000 / 2). The gain will, therefore, be £16,480 and the ownership period to December 2013 will have been 116 months.

The gain for the period the property was your main home is exempt from CGT as is the gain for the last 36 months of ownership (excluding overlaps to avoid double counting). That accounts for £5,114 (£16,480 / 116 x 36). The remaining gain of £11,366 is split £9,519 to the letting period (less 6 months which are part of the final 36 months of ownership) and £1,847 to the vacant period.

As the property was both your main home and it was let you are entitled to letting relief which is the lesser of:

1 £40,000,

2 the sum of the main residence gain and the gain for the last 36 months of ownership of the property which is £5,114 and

3 the letting period gain of £9,519.

Letting relief will reduce the remaining gain from £11,366 to £6,252. That is below the annual CGT exemption of £10,900 but you will have taxable gains on the other flats and on the sale of your share of the marital home so you will probably have some CGT to pay.

Customer: replied 11 months ago.

Hi Tony,


I haven't yet got to grips with what you have just set out above, but you haven't mentioned Flat 2. I think i said earlier that my plan is to move down to flat 2, from flat 3, as soon as it becomes vacant, on Monday, I believe. That way, I will surely become elligible for principal residency on that flat as well, and thus get the three year exemption. As far as I am aware, it doesn't really matter how long one has lived there, just so long as it was, in fact your main residence at some point of the ownership.


As regards, XXXXX XXXXX I was assuming that I could claim exemption for the last 3 years, as it was occupied by me from Dec 09 til Mar/Apr 10, as my only residence. Though, I accept that I would not be able to claim letting relief as I havent ever let it out.


Does this alter your final computation?

Expert:  Tony Tax replied 11 months ago.

I thought all the flats were the subject of a CPO. How can only one in a block be subject to a CPO?

I asked earlier for the exact periods of occupancy by you of the flats. You said you had lived in Flat 1 in "Dec 09". How long will you be living in Flat 2? Why move from Flat 3 if they are both being sold?

Customer: replied 11 months ago.

The property is a large terraced house on 3 floors. Each floor consists of a self contained flat.


The entire building is subject to the CPO. It was purchased, as I said, as a single entity for 77k.


I moved into Flat 1 in December 2009, when I left the marital home. I then moved to different rented accommodation near my work from Beginning April 2010 until Jun 2011. The I moved back to the property, but this time I moved into Flat 3. I live there now. As the tenant in Flat 2 will shortly be leaving, I wanted to immediately inform the council that I will take up Flat 2, so that I can legally claim that I will have resided in each of the 3 flats before completing the sale in December 2013.


I am sorry if this has been a complicated situation, and if I had not adequately described the situation. Please ask if it needs further clarification. Thanks.

Expert:  Tony Tax replied 11 months ago.
If you move into Flat 2 knowing that it is in the process of being sold the tax office are likely to challenge your claim for main residence relief as it will be obvious why you have made such a short term move. Whilst there is no minimum period, the tax office do challenge taxpayer's motives for choosing to move into a property for such short periods. I'm not saying that they will definitely challenge you but they might. Frankly, some of the so called experts telling people to move into a property for a month in order to qualify for main residence relief have never had dealings with HMRC on this topic. Many are academic tax experts trying to sell tax books in my experience.

FLAT 2 WITH MRR AND LETTING RELIEF


Flat 2 cost £34,000 and will be sold for £54,360 (£151,500 x 36%) so the gain will be £20,360. Main residence relief will be £6,443 (£20,760 / 116 x 36). The letting period gain will be £ 11,633 (£20,760 / 116 x 65) and the vacant period gain will be £2,684 (£20,760 / 116 x 15). The taxable gain will be £7,874 (£20,760 - £6,443 main residence relief - £6,443 letting relief).

FLAT 1

If you lived in Flat 1 for 4 months from December 2009 to March 2010, it is sold for £48,480 having cost £32,000 and claim main residence relief that will cover £5,683 (16,480 / 116 x 40) of the profit leaving a taxable gain of £10,797 (£16,480 / 116 x 76).
Customer: replied 11 months ago.

Hi Tony, I'm afraid I got lost following your computations below:-



As for Flat 3, I'm assuming that the disposal proceeds will be £48,480 (£151,500 x 32%) and that contracts will be exchanged in December 2013. The cost is £32,000 (£29,000 / 2 + £35,000 / 2). The gain will, therefore, be £16,480 and the ownership period to December 2013 will have been 116 months.

The gain for the period the property was your main home is exempt from CGT as is the gain for the last 36 months of ownership (excluding overlaps to avoid double counting). That accounts for £5,114 (£16,480 / 116 x 36). The remaining gain of £11,366 is split £9,519 to the letting period (less 6 months which are part of the final 36 months of ownership) and £1,847 to the vacant period.

As the property was both your main home and it was let you are entitled to letting relief which is the lesser of:

1 £40,000,

2 the sum of the main residence gain and the gain for the last 36 months of ownership of the property which is £5,114 and

3 the letting period gain of £9,519.

Letting relief will reduce the remaining gain from £11,366 to £6,252.


I understood the MRR of £5114, but didnt understand how you ended up with £6252. I got the letting period of 67 months;vacant 13 months & residential of 36months, but not how you arrived at £6252. It's late and probably brain not working right. Be in touch tomorrow afternoon.

Expert:  Tony Tax replied 11 months ago.
The gross gain is £16,480. That is reduced to £11,366 by deducting the main residence relief of £5,114. Letting relief is £5,114 (the lowest of the three figures in 1 to 3) and that reduces the remaining gain to £6,252.

Let me know if you have any further questions.
Customer: replied 11 months ago.

Yes, don't you sleep??

Expert:  Tony Tax replied 11 months ago.

I hate going to bed with unanswered questions because I will dream about them!

 

The £6,252 is the net taxable gain for Flat 3.

Customer: replied 11 months ago.

NO!!! Go to bed, my brain has stopped working. I will come back tomorrow with fresh eyes and sign off! Goodnight, sleep tight! & Sweet dreams!

Expert:  Tony Tax replied 11 months ago.
I'm not sat here just waiting for responses to my answers. I'm usually at home listening to music or watching TV. When a response to an answer or a new question comes through I switch down the sound and start typing.

I'll look out for your next post tomorrow. You might read HS283 if you haven't already done so from my earlier link. It might help you make sense of the figures and my answers. Don't hesitate to ask for clarification of any point.
Customer: replied 11 months ago.

I think it didn't sink in about the lesser of.... I had thought from things I had read that you could stack up the 3 years exemption plus the letting relief.


Anyway, I shall read up your link tomorrow. Thanks again for your help. Roger, over and out!

Expert:  Tony Tax replied 11 months ago.
Thanks and good night.
Customer: replied 11 months ago.

Hi Tony,


After I checked out last night, I had one last look at your figures and finally the penny dropped! Basically, in all cases the MRR was the lowest figure so that was deducted twice to arrive at the taxable gain.


Thanks for your patience, hopefully all will go smoothly with HMRC.

Expert:  Tony Tax replied 11 months ago.
Thanks and good luck with HMRC.


Tony Tax, Tax Consultant
Category: UK Tax
Satisfied Customers: 14165
Experience: Inc Tax, CGT, Corp Tax, IHT, VAT.
Tony Tax and other UK Tax Specialists are ready to help you
Customer: replied 11 months ago.

Thanks, XXXXX XXXXX out!

Expert:  Tony Tax replied 11 months ago.
Thanks for accepting my answer.
Customer: replied 11 months ago.

Hi Tony,


Can I ask another CGT question?


Last tax year, I gifted a share of property to my daughters, which had reverted back to my husband and myself upon the death of my son in 2009. My share of the loss was £6680. I didn't declare it as I hadn't even understood that my gifting something was liable to tax, regardless of whether it had gained or lost value. Which just goes to show how ignorant I am! However, I have just discovered that some savings in an accumulated trust savings account that my father set up for my children while he was still alive, is actually in my name and not my daughter's name. I would like to transfer it into her name as she is old enough to take charge now.


My question therefore is simply whether last year's loss can be offset against this year's gain (of transferring the account into her name)?


Thanks for your attention,


Pat

Expert:  Tony Tax replied 11 months ago.
You have four years from the end of the tax year in which the capital loss of £6,680 was incurred to claim it either by putting it in the tax return for the relevant tax year or by letter to the tax office. That loss can then be offset against the next available gains. You would, however, only use as much of the loss as is required to reduce the gains to the level of the annual CGT exemption.

The account your father set up for your daughter has nothing to do with capital gains or your personal taxes at all. You have effectively held it in trust for her until she reached the age at which she can manage it herself. If any interest has accrued, it may have had tax deducted which your daughter may be able to reclaim from the tax office by completing a form R40.
Customer: replied 11 months ago.

Tony, the monies invested by my father for my kids was put into an M&G Investment savings plan, and when I spoke to them today I was told that I am the nominated account holder along with my husband. I asked about transferring it into my daughter's name and it was the guy's opinion that I would indeed be liable to CGT as it was effectively my asset! The other matter I have discovered with regard to the loss connected to the share of the property gifted last year to my daughter, is that a loss incurred by a gift to a connected person, can only be offset against a gain with regard to the same connected person! Confusing or what!

Expert:  Tony Tax replied 11 months ago.
That's correct. It's a clogged loss which can only be offset against gains made by disposing if assets to the same individual, ie your daughter. Read about those here.

If it would be easier to treat the M&G plan as yours then go ahead. Without knowing exactly what type of investment it is I can't say whether there would be a gain or a loss on the transfer to your daughter. Some investment plans are in the form of a life policy which is backed by investments in shares and bonds etc.
Customer: replied 11 months ago.

Thanks, Tony. In the event when one loss counteracts a gain, does one have to inform the taxman, or is it ok to just to ignore it then?

Expert:  Tony Tax replied 11 months ago.
You are supposed to report gains and losses but look here for the criteria.
Customer: replied 11 months ago.

Thanks for your help. Much appreciated! Hope you can have a relaxing evening. I will look at the links in a bit, tax is definitely taxing for my poor brain!

Expert:  Tony Tax replied 11 months ago.
Thanks.

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