Q I am really confused about the capital gains tax. I have just made an offer for a second house, in which I intend to live. I also plan to release the equity in my current home and turn it into a rental property as it is very rental. I bought my current house about 13 years ago for £ 130,000. It is now worth £ 265,000. My hope is to free up 75% of the equity to buy my new home.
What capital gains tax will I have to pay? It was rented for two years when I was working overseas and I plan to rent it for another five years after purchasing my new home. I only have attorneys’ fee estimates and so on when buying the house I plan to rent because I didn’t keep records and lost some documents when I went work abroad.
I’m also considering leaving it for only two and a half years after I move so that I can recoup the stamp costs. And also hoping to put in trust for my son when he turns 18 so that he is not liable for inheritance tax and also because I will not need the income generated as a rental at that time.
A You are right, you are really confused about Capital Gains Tax (CGT). This tax on capital gains realized on assets – such as property or shares – does not come into play until after the asset has been disposed of. So in your case, not until you sell the house or give it to your son, although if you give it to him through a trust it is apparently possible to avoid CGT by using what is called “retention relief” – but if you want to know more about it, you’ll have to ask a specialist accountant.
CGT doesn’t come into play when you are raising money from a property by taking out a mortgage, which I assume you will be doing to free up the equity in your current home – I don’t see how you would otherwise.
Regarding the recovery of the additional property tax (SDLT) that you will have to pay on your new home (because you will not have sold your current home), HM Revenue and Customs (HMRC) says that you “must have sold your old main residence within three years of purchasing the new property [on which you would have paid the higher rate of SDLT] to be entitled to a refund ”. Giving the proposed rental property to your son – whether through a trust or as a direct gift – does not appear to count as the sale of the property for the purposes of determining whether you are entitled to an SDLT rebate.
Finally, if you want to keep it simple and expect to live a long and happy life, you can simply give the rental property to your son when he turns 18 and live another seven years to avoid inheritance tax. But if you want to maintain some sort of control over the property and don’t mind complicating things, you’ll need to speak with a legal professional to find out what kind of trust would be best for your situation.