Q I am writing in utter despair and I am hoping you can help. My partner owns a house that he has always rented out. He now needs to sell this property so we can buy our first house together as we are currently renting. He also needs to clear a debt of £50,000 from a messy divorce.
My partner bought his rental property in 1998 for £100,000; it has recently been valued at £370,000. He remortgaged the house to pay for a property with his ex-wife, which she was given as part of the divorce settlement. As a result, when he sells the rental property there will be a mortgage of £125,000 left for him to pay off.
Here comes my nightmare: I have tried to work out how much capital gains tax (CGT) he will have to pay and it’s roughly £65,000 if we include the £125,000 mortgage (that his ex has gained from not us). Can this be right? How is this possible? Is there anything we can do? If we pay £65,000 in tax on top of the £50,000 court debt we will be left with very little to purchase a house for us and children. EM
A I’m not sure that most people would regard having £130,000 (that’s the £370,000 valuation minus £125,000 minus £50,000 minus £65,000) to put towards the purchase of a house as “very little” although I can see that it might not be enough to buy a house outright without a mortgage. That £130,000 figure also assumes that your CGT calculation is correct, which I’m slightly doubtful about, not least because you mention including the mortgage in the CGT sums – you don’t need to do this.
You do, however, need to factor in buying and selling costs such as legal fees, stamp duty, estate agents’ fees and the cost of capital improvements to the property if there were any. This works in your favour because it reduces the taxable capital gain.
Stamp duty on a property costing £100,000 was definitely 1% of the whole sum in 1998, so £1,000. But guessing at the other costs – for example, £2,000 for two lots of legal fees and estate agents’ fees of, say, £6,000 and no improvement costs – the gain would be £261,000. Knocking off your partner’s annual CGT exempt amount of £11,100 from this (in the 2016-17 tax year) would bring the gain down to £249,900. Admittedly, this isn’t small but would result in a tax bill of £44,982 for a basic-rate taxpayer and £69,972 for a higher-rate taxpayer.
An alternative to selling the rental property and avoid triggering a CGT bill would be to remortgage it to raise the funds to pay the £50,000 court debt and provide you with a cash deposit to put towards a home for you, your partner and your children. Assuming your partner could increase the mortgage to 75% of the value of the property, this would give you both just over £100,000 for your new home. But you would also probably need a residential mortgage to buy it. Whether the figures work for your lenders is down to them. Your partner’s accountant (if he has one) might also like to take a look at them.
