Capital Gains Tax Mitigation Question

I agree any calculation of CGT should deduct the original deposit, and all buying and selling costs – solicitors, searches, stamp duty, mortgage application and closure fee, surveyor’s valuation etc etc. You can also deduct money spent on capital improvements, unless (obviously) you have already made a claim for this against your rental income.

The rules can get quite complex here, but essentially if you spend money on something that represents an improvement to the property, this can only be deducted against capital gains, not income. If you only repair or replace an existing item, then it should be claimed against income. An extension is pretty clear-cut: it is mostly an addition to the house, so can only be deducted from the capital gains when you sell the property (make sure you keep good records and receipts!). Similarly if you repair a tap or a roof tile, this is a repair and should be deducted against your rental income. However some expenditure can be part-capital and part-income: for example, if you replace your bathroom, the cost of replacing the tiling, toilet, sink and bath etc can be deducted from income, but if you add an entirely new shower fitting or standalone shower, this is an “improvement” as far as HMRC are concerned and you can only make a deduction for it against your final capital gains.

I am fairly certain that the lender will be unhappy with the transfer if a new mortgage is not effected in joint names. Technically a transfer is required to be registered on the land registry and this will impact on the mortgage/ loan secured on the property.
I know from talking to a few advisers that SDLT is payable only on the mortgage amount if there is TOTAL transfer from one spouse to the other. However, I am unsure of how this is affected in the event of only a partial transfer to the order of 50:50 ownership? Any comments is appreciated. Thanks

Reply to the comment left by “Max Cave” at “20/11/2013 – 17:24“:

Hi Max

What you need to bear in mind is that in this instance all transactions would happening within milliseconds, i.e. the transfers between spouses, the repayment of the lenders debt and the transfer of the property to the new owner. It is all done on solicitors undertaking in much the same way as one solicitor undertaking to send funds to another solicitor prior to completion of a sale. There is absolutely no requirement to involve a mortgage lender. I absolutely know this to be a fact as members of my family have done this and I know several other accountants and solicitors who use this technique on a regular basis to LEGALLY reduce CGT liabilities for their clients.
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Reply to the comment left by “Mark Alexander” at “21/11/2013 – 13:59“:

Thanks for that Alexander. That is a great logical answer and one that I shall explore further.

What happens if there several people (say 4-5) were teaming up to buy a property to refurb and resell?

When they split the profit equally 4-5 ways, does each of them get to use the £10,600 CGT allowance on their own share?

Would it make a difference if one of the 4-5 actually lived in the property during the refurb?

Are there other implications of having shared ownership like this, for just a period of a few months?

Thanks!

Reply to the comment left by “Richard Peeters” at “23/11/2013 – 11:50“:

Maximum 4 on a mortgage deed but if they are all married couples you could, theoretically, end up using 8 peoples annual CGT exemption limits on the day of sale.

If one person had lived in the property it MIGHT make a difference. However, they would need to prove it was their principal private residence and if there were up to 7 other owners I suspect HMRC would investigate and make their lives hell for a while so not to be recommended. I’m not certain but I suspect HMRC would only allow the PPR relief to be used pro-rata to the owner who lived in the property. I can’t be certain of this because I am not aware of any case law where it has been tested.
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Hi there – all the above very interesting advice.

My Q is….is this strategy (involving another party on the day of sale) equally do-able when the other person is not a spouse (eg a trusted friend) and also could two other people be used thus creating three annual CGT exemptions for the sale transaction? Cheers!

-> What happens if there several people (say 4-5) were teaming up to buy a property to refurb and resell?

As I understand it if the aim is “buy to sell” then this is property trading, so you have to pay income tax not capital gains. I don’t know what’s the minimal time a property needs to be rented to make it investment not trading.

Reply to the comment left by “Ian Ringrose” at “23/11/2013 – 14:35“:

Thanks Mark and Ian – both raise good points: it probably would be seen as trading, so we couldn’t avoid tax that way, even if one person did live in it.

Reply to the comment left by “Chris Mayger” at “20/11/2013 – 10:17“:

Hi Chris,

I have had a glance at the comments here.

Have a read through this HMRC document here:

http://www.hmrc.gov.uk/helpsheets/hs283.pdf

There are CGT rules regarding Deemed Occupation and how if you occupy it at any time as an Owner as your sole residence you will be able to lower your CGT liability. The 3 year rule can be very handy especially if you have only let the property for 3 years.

I’ll leave your accountant to explain the rest.

I hope this helps.