Sale of holiday home

Question.

I acquired an investment property several years ago on the North coast which I use as a holiday home. I paid £100,000 for the property in 2000 and my mortgage is currently £60,000. Similar properties in the area are selling for about £180,000 so I am considering selling the property and releasing some cash to help pay for my son’s university fees in October. What tax will I have to pay on the sale and can I reduce my tax by offsetting the outstanding mortgage on the property against the sale proceeds?

Answer.

Most investment assets, such as shares and investment properties, are subject to capital gains tax (CGT) when they are sold by a UK resident individual. If you sell a property which has been used as your main home, even for a short period of time, principal private residence tax relief may apply, allowing you to reduce your CGT exposure or avoid a CGT liability entirely. However, assuming that this house has not been your main home at any time since you acquired it, any gain made on the sale of the house, less any costs you incurred improving the property and any stamp duty and professional costs you incurred buying and selling the property, will be liable to CGT. Unfortunately, any outstanding mortgages or debts on the property are not tax deductible for the purposes of calculating your CGT liability. If we assume that you sell the property for £180,000 and that the improvement costs, stamp duty costs and professional costs incurred on the property since you bought it are £15,000, your gain, after also deducting the property’s acquisition cost of £100,000, is likely to be £65,000. This net gain is then taxed at a flat rate of 18% or 28% depending on what other taxable income you have. If you sell the property in the current tax year and your other income exceeds approximately £43,000, the 28% CGT rate is likely to apply. It is important to remember, however, that the first £11,100 of an individual’s capital gains in 2016/17 is exempt from CGT. Therefore, assuming that you have no other capital gains in 2016/17, a gain of £65,000 arising on your holiday home would be reduced to £53,900, resulting in a potential tax bill of £15,092.

If, however, the property was moved into joint ownership with your wife before you sell it, as opposed to being solely owned by you, any gain on the sale of the property would be split between you and your wife in the same ratio in which you own the property, which is most commonly 50% each. On a subsequent sale of the property the gain would therefore be reduced by two annual allowances of £11,100, rather than just one allowance. By having the property in joint names your taxable gain of £53,900 would be reduced by a further £11,100, down to £42,800, resulting in a reduced tax bill of £11,984. This bill may be reduced further if your wife has no other sources of income in the tax year of sale.

After the sale both you and your wife would be required to complete a tax return for the tax year in which the property was sold, and any CGT would be due to be paid by the 31st January following the end of that tax year. If your proceeds are £180,000 and you pay off your mortgage of £80,000 and also then pay the tax due for you and your wife of £11,984, you will have released after tax cash of approximately £108,000 to pay for your son’s university costs.

The advice above is specific to the facts surrounding the questions posed. Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.