Tenant wants to purchase the property: What are the CGT implications?
Question I own a second property, which I rent to my son. He wishes to join the property market but can't afford a mortgage. He has proposed to buy the rental property he occupies by paying me a fixed sum each month for a pre-defined percentage ownership of the rental property. He will continue to pay me rent on the percentage I still own. My questions are: (1) Do I pay capital gains tax (CGT) or income tax on this fixed monthly sum? (2) If it is CGT to pay but the annual sum paid each year is below the personal CGT allowance, do I avoid paying CGT year on year?
Arthur Weller replies:
The money he pays you is subject to CGT. If you would make a new contract each month, then each month would be a new sale, and would trigger a small capital gain. Because CGT is dependent on the contract (see HMRC’s Capital Gains manual: www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg14260). But if instead you had only one contract, which stated that the property is being transferred and paid for a bit each month, the whole amount would be subject to CGT immediately. If you choose to make a new contract each month, and the sum total of the capital gains is below the CGT annual exemption, it is possible to avoid paying CGT year on year.
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