Question: I got married last month and only now realise the huge tax implications. Should I sell my house within 6 months to avoid the tax man's bill?
My Story
I bought my house in 1996 for 100K Euro (87K IRP), it's now selling for 470K and it has been my Principal Private Residence until I got married in Dec 2005. Until now I have been using the Rent A Room scheme and so have not been liable to Capital Gains Tax (CGT). In Jan I moved into my wife's house and so accepted that I would have to pay tax on rental income plus CGT on any increase in the value of the house.
To my horror I have just found that
a) No account is taken of the value of the house when I now move out (9 years after purchase). They just take the ratio of the number of years for which I was liable. E.g. after 5 years the ratio is 5/(5+9)
b) 2003 budget does not allow any inflation relief on the initial capital in 2004 and later. So from 1996 to 2003 the capital is allowed to increase by 127.7% before I have to pay CGT. But after 2004 the initial capital becomes more and more irrelevant to the CGT calculation.
So if I sell the house, assuming zero house price inflation (quite likely given the bubble), here is how much it will have cost me to get married;
Scenario 1: I didn't get married
CGT 0, Rent Tax: 0; Total: 0
Scenario 2: I got married and sold after 5 years
CGT
470K - 100K x 1.277) x (5/14) x 0.20 }+ 5x 6K x 0.42
CGT:24.5, RentTax: 12.6 ; Total: 37.1K
Scenario 2: I got married and sold after 10 years
CGT
470K - 100K x 1.277) x (10/19) x 0.20 }+ 10x 6K x 0.42
CGT:36.1, RentTax: 25.2 ; Total: 61.3K
Scenario 3: I got married and sold after 20 years
CGT
470K - 100K x 1.277) x (20/29) x 0.20 }+ 20x 6K x 0.42
CGT:47.3, RentTax: 50.4 ; Total: 97.7K
The tax paid get even worse when if house price inflation is at 5% because that 1.277 will never get bigger as time goes one but the ratio of years occupied tends toward 1.
I still will pay CGT if house price inflation is negative even though I am not liable to anything today.
Finance Minister should
1. Value property from the time on which CGT is liable
2. Apply inflation to initial purchase capital and increase the CGT up from 20% if necessary. (instead 2003 budget came up with this stealth tax)
Should I sell now or hold the property until the day I die?
My Story
I bought my house in 1996 for 100K Euro (87K IRP), it's now selling for 470K and it has been my Principal Private Residence until I got married in Dec 2005. Until now I have been using the Rent A Room scheme and so have not been liable to Capital Gains Tax (CGT). In Jan I moved into my wife's house and so accepted that I would have to pay tax on rental income plus CGT on any increase in the value of the house.
To my horror I have just found that
a) No account is taken of the value of the house when I now move out (9 years after purchase). They just take the ratio of the number of years for which I was liable. E.g. after 5 years the ratio is 5/(5+9)
b) 2003 budget does not allow any inflation relief on the initial capital in 2004 and later. So from 1996 to 2003 the capital is allowed to increase by 127.7% before I have to pay CGT. But after 2004 the initial capital becomes more and more irrelevant to the CGT calculation.
So if I sell the house, assuming zero house price inflation (quite likely given the bubble), here is how much it will have cost me to get married;
Scenario 1: I didn't get married
CGT 0, Rent Tax: 0; Total: 0
Scenario 2: I got married and sold after 5 years
CGT
CGT:24.5, RentTax: 12.6 ; Total: 37.1K
Scenario 2: I got married and sold after 10 years
CGT
CGT:36.1, RentTax: 25.2 ; Total: 61.3K
Scenario 3: I got married and sold after 20 years
CGT
CGT:47.3, RentTax: 50.4 ; Total: 97.7K
The tax paid get even worse when if house price inflation is at 5% because that 1.277 will never get bigger as time goes one but the ratio of years occupied tends toward 1.
I still will pay CGT if house price inflation is negative even though I am not liable to anything today.
Finance Minister should
1. Value property from the time on which CGT is liable
2. Apply inflation to initial purchase capital and increase the CGT up from 20% if necessary. (instead 2003 budget came up with this stealth tax)
Should I sell now or hold the property until the day I die?