The View from No 50
K P Bonney & Co
Chartered Accountants and
Chartered Tax Advisers
Ilkley LS29 6JA
Tel: 01943 870933
Fax: 01943 870925
CAPITAL GAINS TAX AND THE FAMILY HOME
“I am thinking of selling my house. What are the tax consequences?”
“I am thinking of moving house but keeping my old house and renting it out. What are the tax consequences?”
Clients have asked these questions with increasing frequency in recent months. We looked at capital gains tax and the home in our July 2000 newsletter but the subject is clearly a popular one and worth repeating, so here is a cut and paste job from three years ago.
The View from Number 50 - July 2000.
Even though interest relief on mortgages to buy the family home has been abolished, the capital gains tax exemption for the principal private residence remains and is an extremely valuable relief. If you sell your only or main residence, the capital appreciation is tax free.
What if I have rented out my house?
If you have not occupied your property as your main residence throughout your ownership, perhaps because it was rented out at some point, the total gain will need to be apportioned on a time basis. However, if the rented period was immediately before a sale the whole gain may still escape tax because the last three years of ownership are always exempt. Furthermore, potentially up to £40,000 of taxable gain can be relieved under a special exemption for residential lettings.
What if I have to live and work away from home?
Temporary absences of up to three years are ignored; up to four years if your employment duties require you to live somewhere else and any length of time if your work requires you to live abroad. You must not have another residence available for relief and the property must have been your only or main residence at some time before and after the temporary absence.
Irrespective of anything else, if a property has at any time been your only or main residence, the last three years of ownership always qualify as exempt.
What if I have two homes?
If you buy a second house, perhaps a holiday home, you can choose which one is to be your main residence irrespective of how much time you live in each. However, the election must be made within two years of buying the second home. This can be particularly useful if a second property is expected to appreciate more than the actual main residence.
What if I use part of my house for business?
If part of the house is exclusively used for business, then exemption is lost on that proportion of the gain. However, even where a proportion of household expenses have been claimed against business profits, the capital gains exemption should remain available in full provided that business use was not exclusive.
Can I sell off part of my garden for development?
Normally, the house and grounds of up to ½ hectare (which is about a ¼ acre) are exempt but a greater area can qualify depending on the size and character of the house. If part of the grounds is sold off but the house is retained, the gain should remain exempt. However, if you carry out the development yourself or incur expenditure with a view to selling at a profit the exemption will be lost.
Our advice: If there has been mixed use of your property, consult us if you intend to sell. Careful timing could make all the difference to the tax position. Be sure to let us know if you acquire a second home as the two year time limit to elect which is your main residence is strictly applied. If you use a particular room at home as an office, ensure there is at least some private use of the room to preserve capital gains tax exemption. And if you are fortunate enough to find a developer interested in part of your garden, sell the building plot first. If you sell the house first, and the development plot later, the development profit will be taxed in full.
COMPANY CARS –
IT NEEDN’T BE ONE-WAY TRAFFIC
Ask any company car driver about the changes to the taxation of company cars in recent years and you risk receiving an answer peppered with lots of *******!!!s. Employers feel equally aggrieved.
As a result of the changes, personal ownership of cars by employees is now much more common. Are there any solutions? Well here is one if you are a car enthusiast.
The amount of tax you pay for the privilege of having the use of a company car is determined by the CO2 emissions of the car and the manufacturer’s list price of the car when it was new.
When the legislation was introduced it was recognised that ‘classic’ cars might have a low list price but a high value and, if the lucky drivers of these cars could get away with paying tax on the list price, this would be a loophole. So a ‘classic car override’ was introduced, the effect of which is to base the benefit not on the list price but on the market value. For this purpose a classic car is a car which is over 15 years old and which has a market value of £15,000 or more.
The result is that older cars with a market value of just under £15,000 are now gold dust.
If ever you wanted an excuse to buy that 1960’s E-type Jaguar, list price £2,000 and current market value about £14,000, this is it. Your benefit in kind is based on a list price of just £2,000!
You can even take the planning a stage further. Suppose you are a car enthusiast owning such a car and you also run your own company (or you get on very well with the company that employs you). Why not sell the car to your employer company for its full value? The company pays you that value and this is entirely tax free because you don’t pay capital gains tax on cars. The company can claim capital allowances on the cost of the car and you get charged a scale charge for private motoring. But because you have crept in under the £15,000 threshold, the scale charge is tiny. Everyone wins except the taxman!
Our advice: This is a wonderful way of saving tax wholly within the law and having fun with a classic car to boot. If you intend to sell an existing car of yours to your employer company you will need to take care with your valuation on or around the £15,000 mark so enlist the help of your friendly second hand car salesman.
LONG TERM CARE
Thousands of elderly people may have been wrongly forced by health chiefs to pay millions of pounds for their long-term health care.
Health Ombudsman Ann Abraham revealed the scandal earlier this year in her report into NHS funding of long term care. She has told health authorities they must trawl through their records for patients who have been wrongly made to pay their care bills since 1996. Apparently there are 55,000 people paying for all their nursing care (which costs £400 a week on average). Many more pay part of their costs.
How can I tell if I should be paying for my care or not?
Where an individual’s primary need is health care then responsibility for that health care falls on the NHS. And whose job is it to assess whether someone’s primary need is health care? The NHS. No conflict of interest there then.
The Ombudsman has just upheld some cases which give an indication of the type of serious illnesses which may be covered. They were advanced Alzheimer’s disease, vascular dementia and severe disability following several strokes.
Our Advice: This is a difficult subject requiring specialist advice. Organisations able to provide further help include Help The Aged (www.helptheaged.org.uk) and Age Concern (0800 009966 and www.ageconcern.org.uk)
“He had no alternative but to make a needless tackle..” Paul Eliot.
“You’ve got to believe that you’re going to win and I believe that we’ll win the world cup until the final whistle blows and we’re knocked out.” Peter Shilton.
“Fair enough, he was in an offside position, but I don’t think he was offside”. Jimmy Greaves.
Copyright Ó K P Bonney & Co LLP 2003. All rights reserved. No part of this publication may be produced, stored in a retrieval system, or transmitted in any form or by any means, electronic mechanical, photocopying, recording or otherwise without prior written permission of the publishers. Disclaimer The publishers have taken all due care in the preparation of this publication. No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the authors or the publishers.
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