Q: My parents purchased their council house in Cheshire using the right to buy discount scheme in 1998. After four years my father was forced into retirement and they asked for my help in paying off the mortgage. The house was signed over to my husband and me in 2002 and we paid the mortgage until it was cleared. My father died in 2008 and my mother in 2014. Since then the house has been rented out, making around £5,000 a year in rental income. Now we want to sell it and expect to do so for around £145,000. What tax will we pay? And how can we keep this to a minimum?
A: The tax you will be liable to pay is capital gains tax (CGT), which, as the name suggests, is payable on any large gain. To work out how much you will pay you will need to calculate the gain by subtracting your “costs” from the amount you will make from the sale.
Chris Springett, a partner at Smith and Williamson, the financial and professional services firm, said your cost in this case is likely to be the value of the property when it was signed over to you by your parents in 2002.
Once you have calculated the cost you deduct that from the amount you make from the sale. For example, if the value in 2002 was £130,000 and you make £145,000 from the sale, your “capital gain” will be £15,000.
Your annual tax-free capital gains allowance is £11,300. Assuming this is your only capital gain of the year, you will be taxed on £3,700 – either at 18pc for lower earners or 28pc for higher earners.
Your gain can be reduced further by other allowable costs, which include costs associated with the sale of the property – such as estate agent’s commission or legal fees.
If you have improved the property during your ownership, for instance by adding an extension, the cost of this can also be deducted from the gain before tax is applied. Normal maintenance spending – such as repointing walls or repainting – is not deductible.
The £15,000 you have made from renting the property for three years will have been taken into account as part of your annual income tax computation, and will not form part of this transaction.
Mr Springett added that, unfortunately, it is unlikely any further capital gains tax reliefs will be available. The main relief available on residential property is private residence relief.
However, this is only available to people who are selling their current or former home. As the house was occupied by your parents, and later private tenants, this does not apply to you.
In association with Croner Taxwise
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