In 2009 my mother passed away leaving her house to my sister and me. We had the house valued at that time with a view to selling it. The valuation then was £100,000. Shortly afterwards I bought my sister’s share for £50,000. Since 2009 I have rented the house out and allowed my son to live there on and off. I have always paid tax on any earnings made from the rental income.
My question concerns the capital gain tax (CGT) liabilities if I sell the property. The house is now worth around £115,000. Would I be liable for capital gains tax at £15,000, the amount of profit made since 2009?
Or is the figure based on £65,000, which is the value of my inheritance plus £15,000?
As the property isn’t, and has never been, your main home, any gains when you sell it are potentially liable to CGT. The CGT rates for residential property are 18% for basic rate and non-taxpayers and 28% for higher and additional rate taxpayers.
When your mother passed away the property was valued at £100,000. There is no CGT to pay on death, and beneficiaries inherit assets at the probate value. This means that you inherited half of the property for £50,000. You then bought your sister’s share for £50,000 meaning from a CGT perspective you are deemed to have acquired the property for £100,000.
If you sell the property for £115,000 you will make a gain of £15,000, which is potentially liable to CGT.
However, you can deduct the costs of buying, selling or improving the property from this gain. That can include estate agents’ and solicitors’ fees and the costs of any improvements that you’ve made to the property, but not normal maintenance such as decorating.
You can also utilise the annual exempt amount. This is a tax-free allowance that permits you to make capital gains of £12,000 for the 2019/20 tax year without paying any tax. As a result, your total tax bill should be significantly reduced or even wiped out entirely.
Tax allowances explained
Every tax year we are all allocated allowances that let us earn, sell, receive and give away assets without paying tax. Below is a rundown of your allowances and what they mean for the 2019/20 tax year.
|Tax Allowance||How much||What it means|
|Personal allowance||£12,500||How much you can earn before you start paying income tax|
|Personal savings allowance||£1,000 for basic rate taxpayers, £500 for higher rate taxpayers and £0 for additional rate taxpayers||How much interest you can earn on your savings before income tax is payable|
|Capital gains tax allowance||£12,000||How much you can make from selling CGT-liable assets before the tax is due|
|Dividend allowance||£2,000||The amount of dividends you can receive before tax is due|
|Inheritance tax nil-rate band||£325,000||The value of your estate that can be handed on after your death without paying inheritance tax|
|Inheritance tax residence nil-rate band||£150,000||The value of your main residence that can be handed to your children without inheritance tax being paid|