Tax Q&A: Capital Gains Tax implications on co-owned properties

Question: I’m trying to get some information on CGT on a property I own with my parents. I own 80% while they each own 10%, and it was my primary residence but not theirs.

I lived in the property for around six years, then moved out. Since then it’s been rented out for two years. As far as I can tell, I would be exempt from CGT, but my parents wouldn’t be, although I can’t find anything to see if that’s correct. If they do have to pay CGT when we sell, how do we work out the CGT required?

Thanks, Peter

Answer: I’ll firstly address the tax implications for you. As a general rule, a property is no longer your main residence once you stop living in it. However, you can choose to continue treating a dwelling as your main residence for capital gains tax purposes even if you no longer live in it.

Broadly, you can treat the property as your main residence for:

• up to six years if it is used to produce income, or
• indefinitely if it is not used to produce income

It is important to note that you can’t treat any other property as your main residence during that period (except for a limited time if you’re moving house). Applying the exemption to your scenario, the maximum period the house can continue to be your main residence while it is used to produce income is six years; and that assumes you have not elected to name any other property as your main residence.

If you sell the property within six years of starting to rent it out, any capital gain realised by you on the sale should be tax-free. Should you continue to rent the property beyond six years, a portion of the capital growth between the market value of the property at the date you first made it available for rent (ie your deemed cost base) and the eventual sale price should be taxable.

As the property was not your parents’ main residence at any time during the ownership period, the CGT exemption will not apply

With regard to your parents, as the property was not their main residence at any time during the ownership period, the main residence exemption from capital gains tax will not apply to them. Therefore a taxable capital gain will arise for each of them upon sale.

A taxable gain is calculated as proceeds less cost base. The proceeds will be your parents’ respective 10% share of the sale price, and their cost base will be their respective 10% share of the original purchase price (plus their 10% share of other cost base items, such as legal fees on acquisition and sale, stamp duty, and renovation and improvement costs).

As this advice is general in nature we recommend you seek the advice of a tax professional when considering your personal circumstances.

Need to know

- Even if you no longer live in a property, it can still be considered your main residence.

- If a co-owner does not name a property as their main residence, CGT exemption will not apply.

- The taxable gain will be calculated based on each co-owner’s share of a property.

Ryan Smith

is financial advisory partner

at PwC