Avoiding Capital Gains

[gearman333]

Hi,

I have owned and rented out my second property for the past 2 years.

I am now considering selling it and would like to reduce the CGT I have to pay.

If I sell my primary residence and move into the second property for a period of say 1 year, wuld this make a huge difference to the CGT to pay?

Thanks

jackie

[Tax Accountant]

Hi,

I have owned and rented out my second property for the past 2 years.

I am now considering selling it and would like to reduce the CGT I have to pay.

If I sell my primary residence and move into the second property for a period of say 1 year, wuld this make a huge difference to the CGT to pay?

Thanks

jackie

Principal Private Residence (PPR) is a property which you use to live in as your home.

If you have used a property as a PPR at anytime in your ownership, you will have the final 3 years ownership period completely exempted from CGT.

If you move to your second property and use it as your main residence for 1 year, and sell within the 3 years of ownership, all 3 years will be exempted from CGT.

However, even if you take longer to sell, and therefore sell after 3 years of ownership, you may not pay any CGT. This is because other reliefs and allowances will kick in (eg lettings relief, taper relief, personal annual exemption) to cover some or all the gain which fallf outside the final 3 years ownership.

NOTE: You don't have to sell your primary residence, to achieve the above, if you don't want to. You could instead choose to let the primary residence if it suits better. Then, so long as you sell within 3 years of moving out, there will be no CGT on that property. Even a longer period may not result in any CGT as explained in the paragraph above.

Also note that you could continue to live in your primary residence and start using the second property as your 2nd home. If you do this, you could nominate the 2nd home as your main home for CGT purposes. This avoids having to move into a 2nd home lock stock and barrell if this is more practical.

Obviously you would need to be using both properties as your home for sometime (no fixed period is stipulated). It is the quality of residence which is more important rather than the length of occupation which is important. However, a period of between 3 to 6 months is often mentioned to establish use as residence.

Does this help?

Ramnik

[gearman333]

Thanks Ramnik that is great news.

If I was to say that the other property was now my primary residence but not actually use it like that, how could the government check?

your reply would be appreciated

jackie

[Tax Accountant]

Thanks Ramnik that is great news.

If I was to say that the other property was now my primary residence but not actually use it like that, how could the government check?

your reply would be appreciated

jackie

It is a question of fact whether a property is used as your residence or not. The facts indicating use as your residence would be like the council tax and utility bills in your name, use of local facilities, etc. Use as a secondary residence does not require the degree of use as much as is the case with the actual primary residence. Second homes in France or in a seaside town cannot be visited all that frequently and yet can be nominated as your main residence. Do your research on the Revenue website and take professional advice if necessary.

However, if the second property is not used as your residence at all, you should not make a false nomination. It is best to stay within the law.

Ramnik

[Tristan]

There is an additional planning opportunity availble as an extension to Ramnik's suggestion:

If you start using the second property as a main residence (as well as the first) you can, as he states, elect for this to qualify for PPR relief. If after, say, 9 months you sold the second property and move back to the first property there shouldn't be any CGT on the sale as you've owned it for less than 3 years. The problem is that you have 9 months of non-occupation on your first property.

You could consider using both properties as a main residence, and make an election to HMRC that you want the PPR on the second property. Then a week later make another election to switch the relief back to the first property. This should allow the full three years exemption on property no 2, with only a sacrifice of 1 week on property 1.

Note - you would still need to demonstrate that both properties were actually main residences, meaning a period of 3-6 months using both as such.

You would be advised to seek professional guidance on this. The position is described in the IR manuals at CG64512.

[Tax Accountant]

Tristan states that ''you could consider using both properties as a main residence, and make an election to HMRC that you want the PPR on the second property. Note - you would still need to demonstrate that both properties were actually main residences, meaning a period of 3-6 months using both as such.''

I just wish to clarify that the second property does not need to be used as a main residence. Therefore, a holiday home by the seaside or in the countryside can be nominated as your main residence even if you use it infrequently. I think Tristan only wished to emphasise that the second property must also be used as a residence for you to be able to nominate it as your main residence for CGT purposes.

Ramnik

[Grange]

You may also be out of time for making the election.

Well worth a trip to a tax adviser and spending a couple of hundred pounds. It'll probably save you thousands and it's a very complex area.

[Tax Accountant]

You may also be out of time for making the election.

Well worth a trip to a tax adviser and spending a couple of hundred pounds. It'll probably save you thousands and it's a very complex area.


Perhaps Grange would like to clarify his comments:

[QUOTE=Grange: You may also be out of time for making the election.]

I obviously don't agree that this is the case in the context of my reply earlier in this correspondence:

[Quote by Ramnik= Also note that you could continue to live in your primary residence and start using the second property as your 2nd home. If you do this, you could nominate the 2nd home as your main home for CGT purposes. This avoids having to move into a 2nd home lock stock and barrell if this is more practical.].

Ramnik

[Grange]

[QUOTE=Karongo]Perhaps Grange would like to clarify his comments:

If he had half an hour sitting in an office with OP he would be delighted to clarify his comments. On the basis of the sketchy information so far provided, he would be unwise so to do! I have not seen enough information to be able to state, categorically, what OP should or should ot do, so at this stage caveat any recommendations with regard to elections. I dare say such an election is more likely than not to be possible.

[Tax Accountant]

[QUOTE=Karongo]Perhaps Grange would like to clarify his comments:

If he had half an hour sitting in an office with OP he would be delighted to clarify his comments. On the basis of the sketchy information so far provided, he would be unwise so to do! I have not seen enough information to be able to state, categorically, what OP should or should ot do, so at this stage caveat any recommendations with regard to elections. I dare say such an election is more likely than not to be possible.

Was the information not sketchy when Grange stated earlier that ''You may also be out of time for making the election.'' ?

Now he is stating that '' I dare say such an election is more likely than not to be possible.''

So what is it?

The fact is that the time limit for making the election has not even started, as the second property is let. A new time limit of 2 years will only start when the letting comes to an end and the property is occupied as a residence. So, at present the question of being out of time does not even arise.

Ramnik