Q: I BOUGHT a flat in 1991 for £48,000 with no loan, in joint names with my wife. The flat was never our main home and was always rented out.
In August 2006 my wife and I separated, and I moved into the flat in October 2006. Part of the settlement was for my wife to sign the flat (then valued at about £230,000) over to me to avoid her paying Capital Gains Tax and this was done during the last tax year. At that time I was informed by my legal team that I would not have to pay any CGT. However, advice has since turned 180 degrees and a very large sum of money appears to be payable by me when I do sell the flat.
Is this correct? If correct, what amount would I have to pay (my income at present is low)?
If CGT is payable, is there anything I can do to lessen the burden, short of never selling the flat?
-AM, Edinburgh
AIn the tax year of separation, one spouse can transfer their half-share in an investment property to the other without incurring a liability to CGT. In the context of a separation in August 2006 and a transfer prior to 6 April 2007 it is correct that no CGT liability arose on the transfer. It is possible that a CGT liability could arise when the spouse who has acquired a whole share in the property sells the property at a later date.
However, there are various
tax reliefs and exemptions that could apply.
Tax relief is available where a property is used as a main residence by an individual. If the property has been at any time the main residence, the last 36 months of ownership qualify as an exempt period for CGT purposes. This means that for a property purchased in 1991, occupied as a main residence from 2006 and sold in 2007, three years out of the total period of ownership of 16 years qualify for exemption from tax.
A further relief known as "lettings relief" is available because a main residence has also been let as residential accommodation. The amount of this relief will be the greater of £40,000 or the amount relieved under the main residence provisions.
Taper relief at the rate of 40 per cent of the gain made is also available to reduce the taxable amount because the property has been owned for more than ten years.
On the basis of a purchase price in 1991 of £48,000 and a sale price in October 2007 of £230,000 and taking into account main residence relief and lettings relief, the estimated CGT liability for a
higher rate (40 per cent) taxpayer will be just over £22,000. This assumes that no other chargeable gains have been made in the year and the 2007-8 annual exemption of £9,200 is available.
A basic-rate taxpayer would pay less tax but the liability would depend on the precise level of
taxable income.
The tax liability could be reduced if any assets which would produce a loss for CGT purposes could be sold in the same tax year as the property or if the taxpayer has any capital losses brought forward from an earlier year.
Under current legislation, keeping the property beyond October 2009 would mean that the proportion of main residence relief available would increase and therefore reduce the tax payable, assuming that the property continued to be used as the main residence.
? If you have a question, write to Rosemary Gallagher, Personal Finance Editor, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: rgallagher@scotsman.com. No responsibility for loss occasioned by any person acting, or refraining from acting, as a result of these answers can be accepted by Grant Thornton or The Scotsman Publications Ltd
