I own a property that was my main home and is now let. The proportion to
PPR (even including the last three years) is now such that I'm on the
edge of paying CGT were I to sell and it gets worse year by year even if
the propery doesn't rise in value (or even falls).

Basically PPR + residental lettings relief + annual CGT allowance = Gain.

I'd like to crystallize my gains and I'd be interested in hearing other
peoples opinions of the following options (and any other suggestions
they might have)

1. Do nothing. I do not envisage wanting to sell the property in the
forseeable future. The property is making a reasonable return based on
money invested.
Pro: Easy.
Con: if I rebase at current prices then there will be no CGT now and, at
least in the short term I'm not expecting any capital gains, more likely
losses. I'm also cognizant of the not unlikely probability that private
residential lettings relief might be withdrawn at the next budget which
would then immediately leave me with an unrealized taxable gain of
around 25K. (after the 10K allowance) and if they remove PPR for the
last three years unless you've lived there or remove accrued PPR on a
property that you've not lived in for 10+ years then the unrealized
taxable gain would be 50K (after allowances)

2. Gift the property to my partner.
Pro: Also easy. She actually already owns 1% and I'd actually give her
another 98%. The property is worth less than the 125K stamp duty
threshold.
Con: Potential inheritance tax liability. Not a major concern as I'd be
pretty unlucky to die in the next seven years. Also my estate goes to my
girlfriend anyway and my share of the property goes to charity so she
could either gift it to charity herself or pay the extra inheritance tax
and she'd still be better off than if the gift hadn't been made at all.
She also doesn't really want to own property (other than her own house)
so would want to give it (or sell it) back to me sooner rather than
later. (I could raise the funds to buy it back from her without her
having to make a loan to me)

3. Sell the property to my partner.
Pro: No inheritance tax liability.
Con: I'd have to lend her the money to do this. Would the taxman accept
that the CGT liabilities had really been crystallized? Also my
girlfriend would want to sell it back to me ASAP to get rid of the debt
which might make the tax man even less happy.

4. Gift the property into a trust.
Pro: I don't really know?
Con: AIUI there is still a potential inheritance tax liability so I
might as well just make a gift. My girlfriend also isn't keen on the
idea as every trust she's known about seems to have been more to make
money for lawyers and hasn't really delivered to the people who set them
up. (She doesn't think that trusts can't work, just that the ones shes
had third hand experience of haven't actually delivered what they
promised and have actually made things worse) It's complicated and I
don't know any or all of the possible consequences.


One other possibility (although I don't think it's actually possible)
would be to put the property into some sort of trust that I could then
sell into my pension. I can (just) get enough money in my SIPP to make
this work. The property is intended as one of a series of longer term
investments for retirement so the limitations on being unable to access
the value of the asset until 55 wouldn't be a serious concern.


Views? Any other options that I've not thought of?


Tim.


--
God said, "div D = rho, div B = 0, curl E = - @B/@t, curl H = J + @D/@t,"
and there was light.

http://www.woodall.me.uk/

Tim Woodall wrote:

I'd like to crystallize my gains and I'd be interested in hearing other
peoples opinions of the following options (and any other suggestions
they might have)

I would imagine that HMRC have a team of experts working out ways to do
this.....then blocking them.

Given that the purpose of the tax rules is to achieve public policy
goals, I'd hope that they succeed, or that the underlying public policy
is changed.

I'd guess part of the underlying policy here is to reward risk taking
and to maintain fluidity of markets.

Following up to summarize my extensive research this weekend. (Note that
this is based on what I've read on the web and not due to any expert
knowledge on my part)

On Thu, 13 Jan 2011 21:47:56 +0000 (UTC),
Tim Woodall wrote:

2. Gift the property to my partner.
This would be fine in general for crystallizing the gains. However, as
she does not want to get involved with running a let property it doesn't
work in this case.


3. Sell the property to my partner.
Ditto to the above. The IOU route seems more common when talking about
discretionary trusts but I didn't find anything that would exclude it
here. I did find a couple of cases reported where the summary seemed to
be that HMRC should have no regards as to how the funds came to the
buyer for a transaction nor what the seller used the funds for in
deciding how to interpret the transaction itself for tax purposes.

4. Gift the property into a trust.
Going the discretionary trust route does seem to be the only option I
have. As it would be under the inheritance tax threshold and I have no
other potentially exempt transfers or gifts into any other trusts to
consider I believe there would be no entry fees, no 10 yearly charges
nor exit charges. (This, of course, depends on the IHT thresholds
remaining and the tax treatment of trusts staying the same)

The disadvantage of this is the ongoing costs of maintaining the trust.
It looks like this could be anything from 300 to 1500 pounds per year.
Additionally the income tax position is complicated - the trust is taxed
at 50% which can then be reclaimed by the beneficiaries (based on their
marginal tax rate) when the income is distributed.


So my gut feeling at the moment is to do nothing. There's a reasonable
probability that the property will never be sold therefore potential CGT
liabilities will never crystallize. If, in the future, we decide that we
do want to sell it then it may be possible to transfer the property to
my girlfriend over multiple years to take advantage of multiple CGT
allowances.


Tim.


--
God said, "div D = rho, div B = 0, curl E = - @B/@t, curl H = J + @D/@t,"
and there was light.

http://www.woodall.me.uk/

On Jan 13, 9:47*pm, Tim Woodall wrote:
I own a property that was my main home and is now let. The proportion to
PPR (even including the last three years) is now such that I'm on the
edge of paying CGT were I to sell and it gets worse year by year even if
the propery doesn't rise in value (or even falls).

Basically PPR + residental lettings relief + annual CGT allowance = Gain.

RobertL wrote:

On Jan 13, 9:47 pm, Tim Woodall wrote:
I own a property that was my main home and is now let. The proportion to
PPR (even including the last three years) is now such that I'm on the
edge of paying CGT were I to sell and it gets worse year by year even if
the propery doesn't rise in value (or even falls).

Basically PPR + residental lettings relief + annual CGT allowance = Gain.

I'd like to crystallize my gains and I'd be interested in hearing other
peoples opinions of the following options (and any other suggestions
they might have)

Another thought: Marry your partner and then do transfer without IHT
implications.

No good. That would not crystallise the gains. The donee spouse would
then be deemed to have acquired the asset at the same date the donor
spouse had acquired it. So the CGT liability would then be transferred
instead of neutralised.

Ronald Raygun wrote:

The donee spouse would
then be deemed to have acquired the asset at the same date the donor
spouse had acquired it. So the CGT liability would then be transferred
instead of neutralised.

Which does lead to a question I've never seen a satisfactory answer
for.

Lets say single man owned house (PPR).

Gets married and the couple move into woman's house (PPR).

Later have kids and want to sell man's house. Wife is now at home with
kids and has no income.

So they want to transfer all but 10K worth of gains to the wife so the
man can use his CGT allowance but the taxable portion is taxed at the
wife's 18% rate rather than the man's 28%

Does wife get PPR (and possible residential lettings relief) given
that she's never lived in the house?

Tim.

wrote:

Lets say single man owned house (PPR).

Gets married and the couple move into woman's house (PPR).

Later have kids and want to sell man's house. Wife is now at home with
kids and has no income.

So they want to transfer all but 10K worth of gains to the wife so the
man can use his CGT allowance but the taxable portion is taxed at the
wife's 18% rate rather than the man's 28%

Does wife get PPR (and possible residential lettings relief) given
that she's never lived in the house?

No, she doesn't. Moreover, the man loses most of his PRR and LR too,
because the relief is only available to be set against gains, and if
nearly all of the ownership is transferred to the wife, then he would
not be making any gains. Sneaky, eh? Taxman one, taxpayer nil.

To see how this would work out in practice, let's suppose that the man
bought the property for 60k and lived in it for 3 years, then moved into
wife;s house and rented his own house out, and they want to sell 13 years
later for 160k. So the gain would be 100k over 16 years of ownership.

If the man retains 100% ownership, he'd get 3+3 years' PRR (worth 37.5k)
and up to 10 years' LR (but capped at 37.5k). So there'd be a 25k taxable
gain, less 10k allowance, so tax bill of 28% of 15k, £4200.

If he transfers 50% ownership to the wife, they each have 50k gain.
He gets PRR+LR worth 37.5k together, so his taxable gain is 12.5k,
and after the 10k allowance his tax bill is 28% of 2.5k, £700. But
the wife's 50k gain gets no relief, only the 10k allowance, so her
tax bill is 18% of 40k, or £7200. So this exercise would have nearly
doubled their joint CGT liability.

Best option here would be to transfer only 10% of the ownership to the wife,
so that she would get 10k of the gain and this would all be swallowed up by
her allowance. He'd get PRR+LR of 67.5k leaving 22.5k taxable, or 12.5k
after his allowance. Total tax bill £3500.

Each additional £1 worth of gain he transfers to the wife would reduce
his tax bill by 7p but increase hers by 18p.

Ronald Raygun wrote:
wrote:


Does wife get PPR (and possible residential lettings relief) given
that she's never lived in the house?

No, she doesn't. Moreover, the man loses most of his PRR and LR too,
because the relief is only available to be set against gains, and if
nearly all of the ownership is transferred to the wife, then he would
not be making any gains. Sneaky, eh? Taxman one, taxpayer nil.

Thanks. Where/how should you go to find out things like this? I'm sure
it's on the HMRC site somewhere but I have a devil of a job finding
the right pages.

(Last time I had a question like this and I rang up HMRC - about
whether employers pension contributions count towards the 20K that are
allowed when calculating whether anti-forestalling regs apply (they
don't) - I got the feeling that the person on the other end of the
phone thought I ought to have just looked it up - it was obvious once
I'd been pointed to the right page but despite reading probably
hundreds of pages I'd never seen that particular one before)


[snip calculation]

Thanks. I think this is probably fair.

If the husband gifts to the wife - discovers that it was a mistake and
the wife gifts it back before the sale, does the husband then also
lose the PPR/LR? (In practice I expect they could pretend that the
original gift never took place at all)

Capital gains tax does seem to be excessively complicated with strange
reliefs and exceptions that aren't always rational (IMO). I actually
think that LR is an "unfair" relief - I don't really understand why it
exists at all if you have another PPR and if you don't and you've
moved into rented accommodation and let out your main home it would
seem more sensible to be able to elect to keep your main home as PPR
even though you don't live in it than the fudge of LR.

So I expect that LR will go away (which I why I would have liked to
crystallize my gains now).

I would actually do away with almost all the reliefs and instead allow
people to make an election to use their CGT allowance to increase the
effective purchase price of assets (but not allow that to trigger a
loss on crystallization). This would even apply to main home and PPR
would go away as well. (Maybe, by default, CGT allowance is always
applied to main home unless a separate election is made to make it
easy for most people)

I think this would be a reasonable brake on rampant house inflation as
well. Once averate house prices start inflating at more than 10K/year
then people will start triggering CGT bills on sale, especially for
short term "speculators".

Tim.

wrote:

Ronald Raygun wrote:
wrote:


Does wife get PPR (and possible residential lettings relief) given
that she's never lived in the house?

No, she doesn't. Moreover, the man loses most of his PRR and LR too,
because the relief is only available to be set against gains, and if
nearly all of the ownership is transferred to the wife, then he would
not be making any gains. Sneaky, eh? Taxman one, taxpayer nil.

Thanks. Where/how should you go to find out things like this? I'm sure
it's on the HMRC site somewhere but I have a devil of a job finding
the right pages.

Dunno. There used to be decent leaflets which were obvious to find.
Then things got worse. Not sure how much it's improved. The search
box on the home page sometimes gets useful hits.

[snip calculation]

Thanks. I think this is probably fair.

If the husband gifts to the wife - discovers that it was a mistake and
the wife gifts it back before the sale, does the husband then also
lose the PPR/LR? (In practice I expect they could pretend that the
original gift never took place at all)

Pretending may be possible, depending on just what you do to make the gift
effective. Documenting it by something like changing the title deeds or
writing to HMRC to tell them, would make pretending impossible. Since
changing ownership between spouses doesn't change much, there is little
point in gifting at any time other than immediately prior to a sale. At
least that's true of the gains tax implications, though there could be
an income issue, e.g. they might want to avoid the husband being taxed
on rental profit.

But technically, in the scenario you describe, the husband would only
lose PRR/LR *after* the date of the gift. He'd still be entitled to
have his last 3 years of ownership qualify for PPR status, but it would
be the 3 years prior to making the gift which would be those 3 years,
since that would be when his period of ownership ends. When the wife
gifts it back, then as far as the husband is concerned it would be a
completely new period of ownership, in respect of which he would not be
entitled to any PRR at all (and therefore to no LR either), unless he
goes to live in it (with the wife, since spouses are not allowed to have
different PPRs) for a bit during that new period.

wrote:

If the husband gifts to the wife - discovers that it was a mistake and
the wife gifts it back before the sale, does the husband then also

He can't do anything, because it was a gift and it is now purely the
wife's decision. I would think, if it was never the wife's decision, it
would be a bare trust and have no effect.

Actually, more generally, you seem to be telling HMRC that your proposed
arrangements aren't what they seem, and I thought HMRC worked on the
intent of the arrangement, rather than the letter, so they might read a
bare trust where your documents showed a discretionary one, if it was
clear that you never intended there to be any discretion.

Are you using a pseudonym?