Capital gains question
Discussion
Sometime in the near future we will be moving my wifes father (Who suffers from dementia) down to live near us. We will buy a small house for him to live in. My wife has power of attorney over his finances. We intend to rent his house out to gain an additional income to contribute to the mortgage of the house we buy and the few hours daily care that he will need.
I understand that after 3 years of having tenants occupying a house you are then liable to pay capital gains tax on any gain in value since you purchased the house??? This is the bit I am unclear about. You see, her father bought the house about 50 odd years ago for peanuts in todays money something like £3k, and its now worth around £700k. So, if in 10 years we were to sell the house, would any capital gains tax be on the profit since purchase i.e. £697k or is it from when her father moves out into rental accommodation.
I hope someone can decipher what I am getting at!
Cheers for any help!
I understand that after 3 years of having tenants occupying a house you are then liable to pay capital gains tax on any gain in value since you purchased the house??? This is the bit I am unclear about. You see, her father bought the house about 50 odd years ago for peanuts in todays money something like £3k, and its now worth around £700k. So, if in 10 years we were to sell the house, would any capital gains tax be on the profit since purchase i.e. £697k or is it from when her father moves out into rental accommodation.
I hope someone can decipher what I am getting at!
Cheers for any help!
Peter101 said:
Sometime in the near future we will be moving my wifes father (Who suffers from dementia) down to live near us. We will buy a small house for him to live in. My wife has power of attorney over his finances. We intend to rent his house out to gain an additional income to contribute to the mortgage of the house we buy and the few hours daily care that he will need.
I understand that after 3 years of having tenants occupying a house you are then liable to pay capital gains tax on any gain in value since you purchased the house??? This is the bit I am unclear about. You see, her father bought the house about 50 odd years ago for peanuts in todays money something like £3k, and its now worth around £700k. So, if in 10 years we were to sell the house, would any capital gains tax be on the profit since purchase i.e. £697k or is it from when her father moves out into rental accommodation.
I hope someone can decipher what I am getting at!
Cheers for any help!
For CGT purposes, the cost of the property in 1960 will be ignored. Instead, its Market Value at 31 March 1982 will be taken to be the "deemed" cost. A 1960 £3,000 house would probably have been worth around £20,000 (or more) in March 1982. So, the "gain" would not be so great (although still excessive).I understand that after 3 years of having tenants occupying a house you are then liable to pay capital gains tax on any gain in value since you purchased the house??? This is the bit I am unclear about. You see, her father bought the house about 50 odd years ago for peanuts in todays money something like £3k, and its now worth around £700k. So, if in 10 years we were to sell the house, would any capital gains tax be on the profit since purchase i.e. £697k or is it from when her father moves out into rental accommodation.
I hope someone can decipher what I am getting at!
Cheers for any help!
The period from 1 April 1982 to the date your father moves out is taken as being the period when the property was his main residence, so that period is totally exempt from CGT.
Another three "grace" years are added on to that just as a "freebie".
It is only after the three year grace period is up where any gain might be taxable.
Example -
House Purchased 01/01/1960 - Cost £3,000
Value at 31/03/1982 - £20,000
Moved out - 31/10/2010
Rented from 01/11/2010 to 31/10/2015
Sold 31/10/2015 - £700,000
The total period of ownership (counting from 1 April 1982) is 403 months.
He lived in the house (again, counting from 1 April 1982) for 343 months plus he gets the "free" 36 months (i.e. 3 years) giving him a main residence period of 379 months (343 plus 36)
The gain he made is £680,000 (£700,000 minus the cost of £20,000)
379/403 of the gain is exempted i.e. £639,504 (£680,000 x 379/403)
This leaves £40,496 chargeable to tax.
However, he can offset his personal Capital Gains Tax allowance of £10,100 leaving £30,396 taxable.
Capital Gains Tax is charged at 18% (or 28% if the person is a higher rate taxpayer so the CGT payable would be in the region of £5,471 to £8,511.
Having said all that, CGT has radically changed three times in the past 24 months so who knows what the rules will be even next year.
Examples are the best way to demonstrate how CGT works.
The example I set out has been simplified a bit but it shows the gist of how things work currently - it could all change next week the way things are at the moment.
Of course, you might have to take into account CGT issues with the flat YOU have bought
The example I set out has been simplified a bit but it shows the gist of how things work currently - it could all change next week the way things are at the moment.
Of course, you might have to take into account CGT issues with the flat YOU have bought
Edited by Eric Mc on Monday 8th November 20:45
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