Cost price of rental property for CGT purposes

Cost price of rental property for CGT purposes

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Suppose that a couple get married 5 years ago. Each had their own home (main residence). They move into the larger house which becomes their joint main residence. The smaller home is rented under a joint arrangement i.e rental profits are split 50:50 and submitted on tax returns. The rental property is now being sold. What cost price should be used for CGT purposes? Can a market value be used at the time the property was first rented or does the original cost price still have to be used?

A market value seems the fairer method as otherwise the original owner would be paying CGT on the gain in value whilst it was her main residence.

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Chris Caspell CTA TEP
By ccaspell
19th Dec 2012 08:10

Original cost

You will use the original cost to calculate the gain which is then discounted by private residence relief and up to £40,000 letting relief.

Assuming the property was rented 5 years ago, and the final three years are deemed as being counted as residence, there will possibly only be 2 years worth of gain left in charge. This will in turn be reduced by the letting relief so you may find, after the annual exemption that there isn't any CGT to pay at all.

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By cathygrimmer
19th Dec 2012 10:19

PPR?

You say that the property was let jointly by the couple - which suggests that it must have been put in joint names at some point (otherwise the rental income would have been in the name of one spouse only). If this was done when it wasn't their main residence, it may have had an adverse effect on the CGT liability - as the acquiring spouse would not get PPR exemption or lettings relief on their half.

As ccaspell says, the original cost must be used (plus any improvement costs) - but that assumes that the property was transferred into joint names after they were married. If it was transferred before they were married, it would not have been a no gain/no loss transfer. The half transferred would have a base cost of market value (with PPR available to reduce or extinguish any gain for the transferring spouse) as it was not an arm's length transfer. Again, the acquiring spouse would not get PPR or lettings exemption on their share if they did not live in the property after they acquired a share in it

Cathy

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