I hope you are able to help. I have a number of inter-related questions about the potential sale of a UK property.
I purchased a property in London in 2000, owned ¾ by me and ¼ by my sister although she is not on the title.
I renovated the property and then moved straight into it, with a friend lodging with me. I did not claim tax deductions or treat the property as a rental property.
I then travelled overseas during 2002-2003 and rented the property fully.
I then moved back in during 2003-2004, again with a friend as a lodger.
In 2004 I emigrated to Australia. The property has been fully rented since that time.
I own several other properties in Australia but have been renting since my arrival so I do not have another PPOR.
I am now considering selling the London property and using the equity to purchase a PPOR in Sydney.
Obviously I am 2 years past the 6 year absence period.
QN1: Is it correct that if I sold the property now I would pay capital gains on the period that I was renting the property, minus 6 years (so owned for 12 years, rented for 9 years (minus 6)) so I would pay capital gains on 3/12 of the capital gain?
QN 2: Is the capital value from which the ATO would measure the capital gain re-set at the date I moved to Australia? i.e. it would not be the original cost of the property?
QN3: does the fact that I had lodgers make any difference?
QN4: Can I attribute ¼ of the capital gain to my sister even though she is not on the title but I hold her share on trust? She will be receiving ¼ of the funds from the sale.
Thanks in advance.
You are deemed to have acquired the property (or 3/4 of it) at its market value when you arrived in Australia to live permanently. This means you acquisition date is also reset but surprisingly you can still use your main residence exemption for 6 years under section 118-145 the absence rule. The only catch is if you had a lodger and that person paid more than their share of electricity food etc then the property was also income producing while you were living there. Note paying a share of the mortgage would be considered paying more than their share of expense. So if they just covered their share of the costs that increased because they were living there the property (or your ¾ share) would be covered 100% by your main residence exemption just before you left. If instead you made a profit on the lodger then you have to look at the portion of the house that was used to earn that income maybe 100% of their bedroom and 50% of the other living areas. If there was only one other bedroom then 50% of the property would have been used to produce income. Reference IT 2167 http://law.ato.gov.au/atolaw/view.htm?docid=ITR/IT2167/nat/ato/00001 So for the 6 years you will only be able to cover half the capital gain with your main residence exemption. Then of course for the next 2 years no coverage. This should be calculated on a daily basis but just roughly if only 50% of the property is covered with your main residence exemption for the 6 years then only 3 of the 8 years, 37.5% of the gain is exempt.
Here is an example of how the CGT calculation would work if the property is considered to be 100% yours:
Market value when you arrived in Australia $500,000
Add any cost you have incurred since arriving in
Australia that you have not otherwise been able
to claim as a tax deduction against the rent 50,000
Selling Costs 15,000
Cost Base $565,000
Less Selling Price $665,000
Capital Gain $100,000
37.5% as main residence 37,500
Taxable Gain $62,500
Less: 50% CGT discount 31,250
Added to your other taxable income and taxed
At your marginal rate $31,250
Now I have simplified the CGT calculation above to get to my point but there are a few other things you should consider such as removing the value of plant and equipment from the sale price and purchase price. For a comprehensive list of what qualifies as plant and equipment refer pages 28 to 37 of http://www.ato.gov.au/content/downloads/ind00313554n17290612.pdf everything that does not have a tick in the Capital works column is plant and equipment. You also need to add back and building depreciation you may have claimed in Australia on the UK property. If you really want to do this calculation in detail and with your own numbers there is a worksheet available in the shopping section of our web site http://www.bantacs.com.au/shopping_property_cgt.php
Now to the issue of your sister. If you have proof that you hold ¼ in trust for her then yes you could only pay tax on 3/4 of the gain, though you have to consider the tax ramifications to her especially if she did not live there and is also in Australia.
None of the above removes you from any possible CGT liability you may have in the UK but if the UK tax the gain made on the property since you arrived in Australia, Australia must give you a tax credit for that amount.