In August 2000 my uncle died and left his house to my sister and me, both recently retired. However, the will said that my uncle’s friend, who had lived with him rent-free for the previous 13 years, should be allowed to remain in the house as long as he wished. He was entitled to a share of the proceeds of the sale of the house — but only if he moved out. He stayed and died in February this year. The house was valued for probate in 2000 at £85,000. We are selling it for £165,000. Does the fact that someone lived in the house for 10 years let us off any capital gains tax?
My sister and I have paid the insurance on the house, which needs serious repair. We are concerned that because of the terms of our uncle’s will we may have to pay substantially more CGT than we would have some years ago. Do we qualify for taper relief?
LH, by email
Hindsight is all too easy, but you and your sister would probably have done better to sell the house and pay your tenant to move years ago, before the gains on the house grew so large — and before taper relief was abolished in 2008. You would then have had a lower CGT bill, and could have been earning a return on the value of the house. As it is, you receive no tax relief for having to endure a rent-free lodger.
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On your figures, you and your sister are going to make a profit of some £80,000.
You can deduct selling costs (agents’ and lawyers’ fees) and any improvements since 2000, but not insurance. And even though you owned the house for eight years while taper relief was in force, you receive no credit for that.
That means a gain of some £35,000-£40,000 for each of you, less your individual £10,100 CGT annual exemptions if you haven’t used them.
To add insult to injury, the emergency budget will probably affect your tax rate: the new 28% rate may catch some or all of your taxable gain.
John Whiting at the Chartered Institute of Taxation said: “The way it now works is that your gain is in effect added to your income. If, as seems likely in this case, that takes your income above the income tax higher- rate threshold of £37,400, the excess will be taxed at 28%.”
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If either of your incomes is less than £37,400, the part of the gain that takes you up to that figure will be taxed at 18%, the rest at the new higher rate.
After 10 years of amicable separation, my husband and I are divorcing and trying to sort out our properties. We jointly own the house I have lived in for 20 years and two other properties, which have been let at times over that period. We have agreed for me to retain the house I live in and for him to retain the two others. My house is worth £400,000, as are the other two together.
I had not realised that in effect we have to sell each other the properties, and so incur CGT. Can you advise the least painful way to do this? Neither of us intends to sell any property and can do this gradually over a few years, but are both approaching 60 and wish to put our houses in order.
MH, by email
You may indeed have a CGT problem, because the usual exemption for a transfer between husband and wife ceases on separation, or at the end of the tax year in which separation occurs.
After that, disposals of assets between you take place at market value, even if you are swapping properties without money changing hands.
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CGT is not levied on the sale of a main residence, but that is not straightforward.
You can each have a main residence since you separated, depending on where your husband has been living for the past 10 years and if and when he bought a home. If, as seems likely, he has not been living in the same house as you, when he transfers his joint interest to you that will count as a CGT disposal by him.
However, HM Revenue & Customs does give you a loophole. ESC D6 allows a former matrimonial home to be regarded as the main residence until the departing spouse — in this case, your husband — ceases to use it as his main residence, or the date of transfer, whichever is earlier.
However, he can have only one main residence, CGT-free, at any one time. And it has to be transferred to you, not just sold.
The position on your other properties is more clear-cut, assuming your husband has not lived in either of them. Giving him your share will trigger a CGT disposal at market value, just as if you were handing over a share portfolio. The tax bill will be the same as if you had sold the properties, except you will not have the cash to pay it.
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