Capital Gains. Need help

Cluster

Hi guys

Heres the situation.

My girlfriend owns a house but she rents it out. The rent is about a 100 euro more a month than the actual mortgage but this is to pay for any work that might need to be done throughout the year.

At least three years ago she was ill advised, in my view, to tell the inland revenue that she was renting, be above board with the revenue and tell them she had a couple renting it. Stupid mistake.

We moved out because we broke.At that time and she couldnt afford the mortgage on her own, yad yada, she moves out. We get back together but move into a different house.

Now she gets these bills from the inland revenue looking for money that she owes them. She explained that she doesnt have it, that she just gets the cost of the mortgage each month. (we're not well off by any stretch of the imagination) All the rent money goes to the mortgage, bar what she has for maintenance of the house. Revenue dont care, they see it as a bussness?? that they want a sahre of the profits??(these people are braindead)

Then we're told that on top of these bills from the IR we have to pay at least 20 000 capital gains tax when she decides to sell it?

Surely this is taking the piss?

Has anybody been in this situation before me and If so what course of action did you take to avoid it?

Apparently If we move back in for a year we wont have to pay it but this seems absurd, doesnt it?

Looking for advice.

Thanks

leeroybrown

You're only entitled to sell your main residence free of capital gains tax. It's viewed as an investment property unless you live there. On top of this the mortgage (+100) euro is being payed by someone else resulting in her investment paying off in the form of a free maintained house over the life of the mortgage. This is also taxable income. The revenue don't care why someone choses not to live in a house just that they are legally due to pay tax because of it.

I fail to see what's wrong with this. Tough luck for making a poor financial decision but just move back in and get rid of the CGT problem.

Also, the Revenue aren't brain dead. They correctly follow the law tightly. Once someone appears on their radar they generally get what is due to the state in tax.

giddyup

some highlights

Cluster wrote: »

she was ill advised, in my view, to tell the inland revenue that she was renting,

All the rent money goes to the mortgage, bar what she has for maintenance of the house. Revenue dont care, they see it as a bussness?? that they want a sahre of the profits??(these people are braindead)

Then we're told that on top of these bills from the IR we have to pay at least 20 000 capital gains tax when she decides to sell it?

Surely this is taking the piss?

So basically what your saying is your girlfriend is effectively running a business (renting a house for profit) and you dont want to pay tax on the profit she makes and you dont want to pay CGT either if she sells. Yeah..no problem. Go ahead. And the the taxman's braindead.:)

In all seriousness though there are ways of minimising the tax she has to pay. For example all interest she pays on the mortgage is allowable as well as a host of other things. If the mortgage is in any way substantial this might take care of a significant portion of the tax. As for CGT I'm not so hot on how you can mitigate this if for example you move back into the house. I'm pretty sure you'll have to do some calculation for the period of time that the house was rented so there will be some CGT to pay.

Try searching/posting on askaboutmoney.com for more detailed advice but don't phrase it as above or they'll probably tell you to **** right off only more politely.

leeroybrown

The Revenue have a reasonably useful Guide to CGT.

Tipsy Mac

This should have all you need http://www.hmrc.gov.uk/cgt/index.htm

Cluster

leeroybrown wrote: »

You're only entitled to sell your main residence free of capital gains tax. It's viewed as an investment property unless you live there. On top of this the mortgage (+100) euro is being payed by someone else resulting in her investment paying off in the form of a free maintained house over the life of the mortgage. This is also taxable income. The revenue don't care why someone choses not to live in a house just that they are legally due to pay tax because of it.

I fail to see what's wrong with this. Tough luck for making a poor financial decision but just move back in and get rid of the CGT problem.

Also, the Revenue aren't brain dead. They correctly follow the law tightly. Once someone appears on their radar they generally get what is due to the state in tax.

Their not braindead I know. Your right in saying that their was a poor financial decision made and we're paying for it now.

I'm just annoyed that now I have to pay the price for that stupid decision.

Thanks for pulling me up on that.

Cluster

giddyup wrote: »

some highlights



So basically what your saying is your girlfriend is effectively running a business (renting a house for profit) and you dont want to pay tax on the profit she makes and you dont want to pay CGT either if she sells. Yeah..no problem. Go ahead. And the the taxman's braindead.:)

In all seriousness though there are ways of minimising the tax she has to pay. For example all interest she pays on the mortgage is allowable as well as a host of other things. If the mortgage is in any way substantial this might take care of a significant portion of the tax. As for CGT I'm not so hot on how you can mitigate this if for example you move back into the house. I'm pretty sure you'll have to do some calculation for the period of time that the house was rented so there will be some CGT to pay.

Try searching/posting on askaboutmoney.com for more detailed advice but don't phrase it as above or they'll probably tell you to **** right off only more politely.

Oh dear. I am such a twat. I KNOW I KNOW. Cant you tell I'm snapping and want to lash out at whoever.

To say shes making a profit is ridiculous but I take your point. So, even If we move back in the will still be CGT to pay?

Dear Dod

Cluster

Tipsy Mac wrote: »

This should have all you need http://www.hmrc.gov.uk/cgt/index.htm

Surely the UK CGT will be different??

Cluster

Thanks people for the pointers. It seems I'm actually the braindead one in all of this. Hard pill to swallow.

The pain of it all

leeroybrown

Cluster wrote: »

Surely the UK CGT will be different??

I think the poster was confused by 'inland revenue' in your original post. It was the official name for the UK government taxation department until 2005.

The_Conductor

If its early in the mortgage- the vast bulk of repayments to the bank will be interest- which is entirely tax deductable against rental income, before determination of tax due. Ditto any expenses paid on the upkeep of the house- providing you have kept receipts for these things. Its entirely possible that the tax bill may be neglible in nature- when you actually sit down and do the accounts.

Re: CGT- as alluded to above- providing you move back into the house and live in it continuously for a period (I think its 5 years), you may get away without paying CGT. A different way of looking at this is- if you are not planning on selling immediately property is depreciating in value daily- so ultimately there may not be a gain on sale.

A different issue- its possible that Revenue may look in a different direction- and revisit the stamp duty paid on initial purchase of the property.

To be honest- an hour with a property solicitor (or a decent accountant) would probably be money well spent.

RoryW

Irish Revenue Guide to Taxation of Rental Income

Re CGT on sale : Example of how CGT tax is calculated

Jan 04 - live in house until june 05
July 05 - rent out house
Mar 08 -move back into house
Sept 08 - sell house

House owned for Jan 04 - Sept 08 = 57 months
Lived in house = Jan 04 - July 05 = 19 months
Lived in house - Mar 08 - Sept 08 = 7 months but this is increased to 12 months as last 12 months deemed as if it was your principal private residence

So occupied for CGT is now 31 out of 57 months

Bought for 200,000 plus legal fees and other costs of 5000 so total cost of 205000.

Sell now for 315,000 with costs of disposal (legal , estate agent) of 15000 so net proceeds is 300000

Profit is 95000 (300000-205000)

Exempt from tax 95000 x 31/57 = 51667

Balance 43,337

Annual exemption 1270

Taxable 42063 @ 20% = 8412 in tax

If sell in first 9 months of year, payable by 31 Oct of same year. If sell in last 3 months of year payable by 31 Jan of following year

antoinolachtnai

She did the right thing by declaring the property. She was well advised.

If you can't afford to pay the tax, then you has made an investment you can't afford. She should sell up and pay the bills.

However, you should be able to remortgage to pay the revenue off.