CGT Query on a second property.

[hjwd]

I have owned and lived in a property for 10 years. Then I inherited a run-down second property which I have spent £10,000 doing up and spent £5k on mortgage and other payments.

Increase in Value of second property = £40k - (10K + £5K) = £25k profit.

Q1: If I sold the second property now how much CGT would I pay presuming I had no other income?

Q2: If I let my first property out and move into the second property. How will this affect my CGT liability should I decide to sell it in a few months time?

Q3: Also, do I need to tell the tax people that I have moved into the second property or just keep proof of that residence?


Many thanks for any answers! :)

[Tax Accountant]

I have owned and lived in a property for 10 years. Then I inherited a run-down second property which I have spent £10,000 doing up and spent £5k on mortgage and other payments.

Increase in Value of second property = £40k - (10K + £5K) = £25k profit.

Q1: If I sold the second property now how much CGT would I pay presuming I had no other income?

A1: The increase in value needs to be considered since the date you inherited the property. Mortgage payments are not allowable deductions. You have not stated what the other payments are. Assuming you have calculated the increase only based on probate value and that only £10,000 renovation expenses are allowable, your gain will be £30,000.

Capital Gains Tax on this will be approximately £4,000 assuming you have no other taxable income or gains in the same tax year as the year of disposal of the inherited property.

Q2: If I let my first property out and move into the second property. How will this affect my CGT liability should I decide to sell it in a few months time?

Answer really depends on the date you inherited the second property. Assuming your stay in the inherited property is accepted as your ''only or main residence'' and provided you sell within 3 years of inheriting the property, all gains will be exempted under Private Residence Relief. This exempts the final 3 years of ownership where the property has been used as your only or main residence at any time in your ownership.

Q3: Also, do I need to tell the tax people that I have moved into the second property or just keep proof of that residence?

If you have let your first property and the second property has become your residence, you should notify this change of address to them.

Notification of commencement of letting your first property is necessary; however, there is no legal obligation for you to notify that the inherited property has become your residence, but this is desirable.

Another possibility is that you could use both properties as your residences. If so, you could nominate the second property as your main residence for Private Residence Relief purposes. This should be done within 2 years of using both properties as your residence. Once such a nomination is made, you could vary the nomination back again in favour of the first property. The gap between the original nomination and the varying of it could be as little as 1 week.

You should refer to the following link from HM Revenue & Custom's Manuals.

http://www.hmrc.gov.uk/manuals/cg4manual/cg64512.htm



Many thanks for any answers! :)

Se replies above in red.

Ramnik

[hjwd]

Ramnik: Thank you for that information. Very much appreciated! :)

Just one or two more questions..

Do I need to notify the Inland Revenue that the second property is my main residence? ie. is there a form, should I write to them? Or, is it good enough to phone them?

Do I need to show bills, council tax payments to prove the second property was my main residence? Or is it implied from the notification detailed above?

[Tax Accountant]

Ramnik: Thank you for that information. Very much appreciated! :)

Just one or two more questions..

Do I need to notify the Inland Revenue that the second property is my main residence? ie. is there a form, should I write to them? Or, is it good enough to phone them?

Do I need to show bills, council tax payments to prove the second property was my main residence? Or is it implied from the notification detailed above?

Hjwd,

There is no statutory form for a notice, or for a variation of such a notice, but the following conditions must be fulfilled.

A nomination by an individual is to be made by notice to the Inspector and is to be signed by the individual.

A man and wife who are living together can have only one main residence for both. If a nomination affects both of them it is to be made by notice in writing to the Inspector and signed by both of them.

A property must be in use as a residence of that individual before a nomination can be valid. A nomination cannot be used to convert a dwelling house which is not being used as a residence into a residence for the purpose of obtaining relief.

An individual is not obliged to nominate the dwelling house which is factually his or her main residence as the residence which is to attract relief. The relative extent to which each is occupied as a residence is not a material factor.

Therefore it is not necessary to show that the nominated house was actually used as your main residence. However, it is necessary to be able to evidence that the nominated house was actually used as your residence during the entire period for which the nomination has effect.

The time limit for a notice nominating a residence as the main residence is two years from the date on which a person first has a particular combination of residences. Whenever there is a change in the combination of residences a new period begins with a new opportunity to make a nomination.

For example, a person had a single residence until 1 April 2002. On that date he acquired a dwelling house and began to use it immediately as his second residence. He has until 31 March 2004 to nominate one of these residences as his main residence.

In 2005 he bought another house and began to use it on 1 July 2006 as a third residence. A new period begins in 1 July 2006 and he has until 30 June 2008 to nominate one of these three residences as his main residence.

On 1 May 2009 he disposed of a residence. A new period begins and he has until 30 April 2011 to decide which of his remaining two residences is his main residence.

A nomination will apply from the beginning of the period to which it relates - the date on which a person first held a new combination of residences, giving rise to a need to determine which was the main residence.

The nomination will have continuing effect until the earlier of the date on which the individual's combination of residences changes, or the date from which a variation of the original notice is to apply.

A nomination can be varied by a further notice which can be given at any time. But such a further notice is only effective for a period beginning not earlier than 2 years before it is given.

Ramnik

[hjwd]

Thanks again Ramnik! :)

What if I let my first property out and move into my second property.

Do I still need to nominate my second property as my main residence? Or would that be assumed in those circumstances?

[Tax Accountant]

Thanks again Ramnik! :)

What if I let my first property out and move into my second property.

Do I still need to nominate my second property as my main residence? Or would that be assumed in those circumstances?

Hi hjwd,

You should not confuse the number of properties you ''own'' with the number of properties you use as your ''home''.

If you let one property and use the other as your home, you have only one residence although you actually own two properties.

Written nomination is only required where you actually use two or more properties as your home during the same period. Because only one property can benefit from Private Residence Relief during any one period, in that case you have to decide which one of your homes should benefit from receiving the Private Residence Relief. If you want the actual main residence to benefit from PPR relief, there is no need to notify the tax office. However, if you want the secondary home to benefit from PPR relief, you have to make a written notification to your tax office.

If you move into your second property and if this is the only house you live in, then you do not need to make a written notification to the tax office. The only house you use as your residence will automatically qualify for Private Residence Relief in those circumstances.

Although the law does not specify any minimum period for which you have to live in the house to qualify for private residence relief, it is advisable to live in the house for at least 6 months.

Have I explained this clearly?

Ramnik

[hjwd]

Very clearly Ramnik. Thanks again! You are a wealth of information!

I have been reading up on PRR as well and it is starting to make sense now.

[Tax Accountant]

Very clearly Ramnik. Thanks again! You are a wealth of information!

I have been reading up on PRR as well and it is starting to make sense now.

You are welcome.

Ramnik

[hjwd]

Another question please...

If I make the second property my main residence for one week and then move it back to my first residence, will I have to prove to IR my residence of the second property by way of Council tax, utility bills, etc.. ? Or will that be assumed?

What if I did not have them?

[Tax Accountant]

Another question please...

If I make the second property my main residence for one week and then move it back to my first residence, will I have to prove to IR my residence of the second property by way of Council tax, utility bills, etc.. ? Or will that be assumed?

What if I did not have them?

I quote from my earlier reply:

''A property must be in use as a residence of that individual before a nomination can be valid. A nomination cannot be used to convert a dwelling house which is not being used as a residence into a residence for the purpose of obtaining relief.''

It comes down to when a property could be said to have been your residence, main or otherwise.

Can any one truly say that the property was your residence simply on the basis that you decided to register it as such for only one week, or even actually lived in it for only one week so as to be able to claim PPR relief?

I doubt very much.

Ramnik

[hjwd]

Ramnik: I have been to the local IR office and notified them in writing that the second property is now my main residence.

Sorry, I did not understand the previous post. Do the IR ask a person to prove that the second residence was the main residence by way of providing supporting documentation? ie. bills, council tax, etc..

Or do they just accept a persons word for it?

Thanks again!

[Tax Accountant]

Ramnik: I have been to the local IR office and notified them in writing that the second property is now my main residence.

Sorry, I did not understand the previous post. Do the IR ask a person to prove that the second residence was the main residence by way of providing supporting documentation? ie. bills, council tax, etc..

Or do they just accept a persons word for it?

Thanks again!

You say that you have already nominated the second property as your main residence. In that case you should understand that:

(1) You will lose the PPR relief for the main residence for the period for which the nomination is in favour of the second property.

(2) You should actually be using, or have used, the second property as your residence, otherwise your nomination will not be valid.The tax office may require to see evidence when you come to sell the nominated property to decide whether your nomination was valid or not.

Ramnik

[hjwd]

I am now in the process of letting out property 1 (originally my main residence until a week ago) and and will be moving into property 2.

As I have been doing up property 2 for one year with a view to making it my main residence, will the time spent doing it up count as residence for CGT purposes? ie. so it will be as if I had lived in property 2 for one year?

Thanks again!

[Tax Accountant]

I am now in the process of letting out property 1 (originally my main residence until a week ago) and and will be moving into property 2.

As I have been doing up property 2 for one year with a view to making it my main residence, will the time spent doing it up count as residence for CGT purposes? ie. so it will be as if I had lived in property 2 for one year?

Thanks again!

An individual may buy a dwelling house but not take up residence immediately because they undertake repairs, redecorations, or other such work.

In these circumstances relief is allowed for the period between acquisition and taking up residence provided that the period does not exceed 12 months.

If the 12 month period is exceeded, a further extension of UPTO 12 months may be authorised by the tax office if there were good reasons for exceptional delay.

What constitutes a good reason for exceptional delay is a matter for the discretion of the relevant officer in your tax office. Normally, it would be expected that the delay would be caused by circumstances outside the individuals control.

If the period of 12 months or the longer period allowed is exceeded, no extension to the period of residence can be authorised. In that event, your period of residence commences only from the actual date residence is taken up.

Ramnik