Q I am really confused about capital gains tax. I’ve just put an offer on a second house, in which I plan to live. I also plan to release equity from my current home and turn it into a rental property as it is very lettable. I bought my current home approximately 13 years ago for £130,000. It is now worth £265,000. My hope is to release 75% of the equity in it to buy my new house.
What capital gains tax will I have to pay? It was rented out for two years when I worked abroad and I plan to rent it out for another five years after I buy my new home. I only have estimates of solicitors’ fees and so on when buying the house I plan to let as I didn’t keep records and lost some documents when I went to work abroad.
I’m also considering letting it only for another two-and-a-half years after I move out so I can reclaim stamp duty costs. And also hoping to put it into trust for my son when he turns 18 so he will not be liable for inheritance tax and also because I will not need the income generated from it as a rental at that point.
AH
A You are right, you really are confused about capital gains tax (CGT). This tax on the gains made on assets – such as property or shares – does not come into play until 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 via a trust apparently there is potential for avoiding CGT using something called “holdover relief” – but if you want to know more about that you’ll have to ask a specialist accountant.
CGT does not come into play when you raise cash from a property by taking out a mortgage, which is what I assume you will do to release the equity from your current home – I can’t think how else you would do it.
As for reclaiming the extra stamp duty land tax (SDLT) that you will have to pay on your new home (because you won’t have sold your current home), HM Revenue and Customs (HMRC) says that you “must have sold your previous main residence within three years of buying the new property [on which you would have paid the higher rate of SDLT] to qualify for a refund”. Giving the proposed rental property to your son – whether via a trust or as a straight gift – does not appear to count as selling the property for the purposes of determining whether you are entitled to an SDLT refund.
Finally, if you want to keep things simple and you expect to live a long and happy life, you could simply give your son the rental property when he turns 18 and live for a further seven years to avoid inheritance tax. But if you want to retain some kind of control over the property and you do not mind complicating things, you’ll need to talk to a legal professional as to which sort of trust would be most suitable for your situation.
