Steve asks: “I have a property which the mortgage is in my name and is my sole residence. I have no other properties. I’m intending to exchange some of the property to my partner and they’ll take on some of the mortgage. Are either of us liable for CGT?”

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Q&A 74 – Capital Gains Tax On Exchange With Partner – Shownotes

Steve asks:

I have a property which the mortgage is in my name and is my sole residence.  I have no other properties. I purchased the property for 200k in 2007 just before the property crash. My partner moved in 2010 (my partner has no other property) we are unmarried but has contributed informally to running the property since then.

We are now intending to re-mortgage the property in joint names (as tenants in common unequal shares), the property has been valued at £188,000 by the new mortgage company and I have reduced the existing mortgage on the property down to £135,000 using solely my own savings (the existing mortgage is interest only.)

My partner has paid me £5,000 to reduce the mortgage down to £130,000.  The new joint-mortgage (repayment mortgage) is for £130,000 to repay the existing loan, we will be contributing 50:50 to the mortgage payments.  I will be giving 20% share in the property to my partner, I will retain 80% share.  I’ve received conflicting advice.  Are either of us liable for CGT as I am gifting some of the equity I have in the property to my partner?

Steve provides us with another capital gains tax, but this one is different to those we have received in the past. In his scenario, it’s actually pretty easy. However, if we change it slightly, it becomes a little more complex.

 

The Simple Solution

Steve said in his question that the property is his sole property and when his partner moved in, that too was her sole property.

As they have never rented the property out, it will be completely exempt for capital gains tax. Nice. However, it isn’t all good news I’m afraid. Because of all the swapping of mortgages and title deeds, this isn’t actually a gift, but is instead classified as a purchase. As such, the transaction will possibly be liable to incur stamp duty.

Effectively, the property is worth £188k and the outstanding mortgage was £135k.

Given that the property will be shared 80%/20% between Steve and his partner, the re-mortgage of the property in joint names as tenants in common unequal shares will also be split 80%/20%.

As such, the gifted value of the property is £188k x 20% = £37,600.

The compensation for the property is the £5k contribution from the partner to paying down the mortgage, plus the 20% of the new £130k mortgage which shall be taken out, equaling £26,000. Therefore, the total payment for the property by the partner is effectively £31,000.

My understanding (and I could be wrong so you should check this with a tax specialist) is that the stamp duty will be due on the value of the property transferred, which is £37,600.

This actually then falls under the bottom band for property purchases of primary residential properties of £125,000, and hence stamp duty is charged at 0%. Phew.

 

What About If It Was Buy-To-Let?

So, what about if this was a Buy-To-Let property and not their own residential property. Well, the end result would actually be the same, but how we get there changes a little.

Firstly, capital gains tax would now be applicable for Steve. However, because the cash he received was £31,000 compared to the value of the property transferred of £37,600 he actually made a capital loss. Therefore, there’d be no capital gains tax to pay here, and the rules surrounding capital losses on property would come into play which we describe in moneystepper.com/question49.

For stamp duty, after April 2016, any sales of BTL properties over £40,000 would be subject to stamp duty, starting at 3%. However, the sale is effectively for £31,000 and hence there would be no stamp duty on this transaction either.

 

 

Check With HMRC

So, good news all round Steve. As I say, you may want to check this directly with the HMRC or with a tax specialist, but from the figures provided, and my understanding of the Capital Gains Tax and Stamp Duty Land Tax rules, you’ll have no tax to pay on this transaction.

Finally, it seems like you are doing everything on paper and above board, but just make sure that you document everything. Make sure your mortgage company know exactly the 80%/20% share and make sure that you submit a change in title deed to the land registry (which you may need a solicitors’ assistance with, but equally you can find the forms online and submit them yourself if you’re comfortable doing so.

Right, we’re back on Friday discussing Danielle’s question regarding a £5k gift she’s just received and wants to know what to do with it. Lucky Danielle!!

 

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