Get married, give the taxman 20% of everything I own?

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gidxl03

Registered User
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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?
 
Very interesting post. Thanks for sharing that, and doing the number crunching. I'm in a very similar situation to you.

Should I sell now or hold the property until the day I die?
Click to expand...

In light of your post, unless there is a change in CGT policy, it looks like I'll be holding onto my property until the day I die. The value of the house has gone up, and so has the rent.
 
In fairness, I think 24k CGT on a profit of 370k after 5 years is pretty good if it worked out that way. That's about 6.5% tax. I believe you are being over dramatic. There's a lot of FTBs out there who would give their right arm to be in your predicament.
Hang on to the property - its unlikely that there will be zero inflation as you suggest, especially over a longer period.
 
Thanks Theo. I appreciate that at first glance it looks like I'm being greedy and moaning about paying tax on a big profit. But buying the house 9 years ago when I earned 15K IRP was not easy (thanks Mum & Dad) and I bought a big one so that I would not have to trade up and pay 9% stamp duty on the next house.

But two points - which I find difficult to make because they are based on some fairly subtle mathematics
  • I could sell today and not pay a cent on gains of 370K. I shouldn't have to - it was my PPR. But if I wait 5 years I will pay 24K on that same gain, wait 20 years the bill will be 47.3. It reminds me of the Bed & Breakfast scheme for shares - I have to realise the profit now.
  • For an investor, it seems to me that since the 2003 budget, CGT in the very long term is no longer a Gains tax; it is effectively 20% stamp duty of the total value of the house on selling. (If I put money in the bank and it rises with inflation I have not gained because it's buying power has not gained. Now I if I have to pay 20% on the increase, the money in the bank is worth 20% less that it was originally). I'm surprised more people are not screaming about this!!
Right now, it looks to me like I have to take the money and run!

PS Marriage is great, I'm very lucky, but I wasn't expecting this. I couldn't have better tentants and will be very sorry to have to give them notice.
 
If you put money in the bank, the only way it would increase is when interest is added. You would be subject to DIRT at 23% on the interest earned.

In most cases, money in the bank is eroded over time by inflation.
 
Get married, give the taxman 20% of everything I own?
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This is completly misleading. In the context of the original comments we are actually talking about a maximum of 20% on part of the capital gain arising from the disposal of the asset. Not 20% of the total value or the individual's total net worth!
 
CGT no longer index linked: Will this cost me 19.9%?

OK I accept the old title "Get married, lose 20% of everything I own" was a bit sensational. I won't lose 20% straight away. But when I sell the house in 30 years time the CGT calculation will be (p2-p1) x 0.20, which when p2 is much greater than p1 is roughly equal to p2 x 0.20 (... where p1 is the initial purchase price and p2 is the final sale price). So I will pay 20% not on the GAIN but on the final price.

Given that I can take p2 now after 9 years with zero tax, it seems my only option.

Genuinely, do I understand the 2003 budget implications on CGT correctly?
 
Re: CGT no longer index linked: Will this cost me 19.9%?

gidxl03 said:
So I will pay 20% not on the GAIN but on the final price.
Click to expand...
This is wrong. If the house was both your PPR (say for x years) and later also rented out (say for a further y years) then you pay 20% CGT on ((y - 1) / (x + y)) of this less the usual allowances and expenses. CGT indexation of the purchase price is allowed up to December 2002 or 2003 (can't remember which) when calculating the assessable gain.
Given that I can take p2 now after 9 years with zero tax, it seems my only option.
Click to expand...
It's not your only option but it does mean that you can take the capital gain tax free now if you choose.
 
Thanks Clubman,
so I think that the formula will be (excluding expenses)
[(P2 -P1) ]x [(Y-1)/(X+Y)] x 0.20
where
  • X is the number of PPR years that I lived in the house (1996-2005)
  • Y is the number of years I rented the house
  • P2 is the sale price (after X+Y years)
  • P1 is the purchase price times a small inflation index for 1996 to 2003
But as the number of years that I rent out the house gets large
[(Y-1)/(X+Y)] tends towards 0.99 (e.g. (50-1)/((9+50) = 0.83
at which time
P2 is much greater than P1 since P1 gets left behind without it's inflation index that
[(P2 -P1) ] becomes approximately = P2
at which time for formula approximates to
P2 x 0.99 x 0.20 (e.g. after 50 years you pay 83% of 20% i.e. 16.6% of the final price)
i.e. with the new CGT formula as time gets large, this is why I said that you pay 20% of the final price. .... very important!
 
The market values at different times - in particular at the point at which the property ceases to be your PPR and becomes a rental property - are irrelevant. The total gain is calculated with reference to the original purchase price (indexed up to 2002/2003 whichever is the cur-off point) and the eventual sale price. Intermediate valuations are irrelevant. Some fraction of that total gain is then assessable for CGT based on the formula that I outlined above. Then allowances and costs are deducted and the remainder is subject to 20% CGT. Your formula above would be correct if P1 was the initial purchase price (indexed for inflation) and P2 was the eventual resale price. The valuation of the property in 2005 is irrelevant. If you still aren't clear on this then you should get independent, professional tax advice.
 
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