CGT and holiday cottage

[supasap]

I have owned a holiday cottage since early 2003 and am now considering selling it with a gain. I would like to legitimately avoid paying a significant CGT tax bill if this is possible. I am unmarried but already have a PPR elsewhere. Would it be possible to stop letting out the holiday cottage and live there myself to avoid paying CGT on the gain. It would be no major upheaval as the two properties are in same county but I wonder what the rules are eg how long would I have to live there to make it qualify as the PPR as I am considering marrying my partner in the next few years and moving into her place (and the CGT I would save would pay for a wedding!).

[Grange]

You need to read Inland Revenue leaflet IR87 - available on their website.

Case law is used to ascertain what constitutes a PPR. The essential feature is 'quality' of residence, not 'quantity'. So strictly speaking one night is sufficient. However you would normally be recommended to live in a property for maybe three months. If you can rent out your normal house that will help.

So, that starts the PPR clock.

If you sell your house after that quarter year, then only the final 3 months are exempt CGT - calculated on a pro rata basis (one quarter of a year, compared to the total two year ownership).

Provided you move back into the cottage within 3 years of leaving, you are able to count the whole 3 years as CGT exempt.

Alternatively, if you sell the property within 3 years, then the final 3 years are exempt from CGT.

So, if you want to reduce your CGT bill, I suggest moving in; moving out after 3 months; moving in again within 3 years; selling within the next 3 years. That should reduce your tax bill to not very much; with your 8,500 annual exemption, plus taper relief, and 40k worth of lettings relief you won't pay much tax.


NOTE: If you buy a second house, make sure that the first thing you do is to live in it; and again every 3 years - then it is more likely to be CGT exempt.

[supasap]

Thanks for the reply, still a bit puzzled as to why I would wish to move out after moving in, if I moved in and stayed there for say a year and sold it what would be the position then, does the moving out and then moving back in put me in a better position than just moving in staying and then selling?

[Grange]

Does the moving out and then moving back in put me in a better position than just moving in staying and then selling?

No. I assumed that living in Eastbourne did not fit well with your high powered City job and that commuting for too long would be hard work!

You have owned the property for 2 years now. So living in it for a future 1 year would reduce the CGT by only one third.

However, do you qualify under the furnished holiday letting rules? If so, I have a sneaking suspicion that the property qualifies as a trading asset, so the CGT taper relief should reduce the tax rate to 10%... you need to check that one, I haven't thought about FHLs in years.

[supasap]

Ha I am in the North so moving in wouldn't really be a major upheaval.
Yes I have rented it out officially through an agent as a holiday let and have secured well above the required days to different holiday makers. I declare the costs and income so it is an official holiday let, not BTL or just my holiday home as it were.

Look forward to your reply.

[Tax Accountant]

So, if you want to reduce your CGT bill, I suggest moving in; moving out after 3 months; moving in again within 3 years; selling within the next 3 years. That should reduce your tax bill to not very much; with your 8,500 annual exemption, plus taper relief, and 40k worth of lettings relief you won't pay much tax.

NOTE: If you buy a second house, make sure that the first thing you do is to live in it; and again every 3 years - then it is more likely to be CGT exempt.

If I understand the reply correctly, I consider that it is not entirely correct. It seems to suggest that each and every 3 year period after moving out qualify for PPR. This is not so. Only one final 3 years period is exempted if the property was previously your only or main residence.

Basically, if you have occupied any property as your 'only or main residence' at anytime on your ownership, you will be entitled to PPR exemption, on a pro-rata basis, for the actual periods of residence plus the final 3 years of ownership. However, if any period of residence also falls within the final 3 years of ownership, it is counted only once.

If you have more than one residence (ie occupied as a residence) at any one time, only one can qualify as PPR at any one time. Normally this is the one which is the main residence as a matter of fact. However, there is a possibility to elect, within certain time limits, to nominate the secondary residence as your main residence for CGT purposes.

In the specific case of the querist, you need to occupy your holiday home as your main residence as a matter of fact or alternatively use it as your second home and nominate it as your main residence for CGT purposes.

By doing this, only the gains relating to all the letting period falling outside the final 3 years is chargeable. However, any such gains is reduced by lettings relief, taper relief and annual exemption.

Ramnik

[Tax Accountant]

You have owned the holiday cottage since early 2003. If you now occupy it as your main residence, all gains will be exempt provided you sell within 3 years from date of purchase. If you do not or cannot sell within the 3 years ownership period, only the gains pro-rata'd to the letting period falling before the final 3 years is chargeable. Any such chargeable gains will be reduced by taper relief and annual exemption.

NOTE: I consider you may not be eligible for the valuable lettings relief because you were letting as a business and not as residential accommodation. I also consider that if you occupy it as your residence, you will have a mixed use asset and therefore you will not be eligible for full 75% business asset taper relief on all your gains.

It is best to do the sums and see whether it is better to sell without occupying it (eligible for 75% business asset taper relief on all gains) or to occupy as you suggest before selling (eligible for 3 years PPR relief plus some taper relief).

Ramnik

[supasap]

OK the profit on the sale would be roughly 50000, so what would be the chargeable gain for:

(i) selling without any period of residence but enjoying business taper relief

(ii) selling with some period of residence

if difference is small then naturally this will guide my decision

I purchased it in Feb 2003.

[Grange]

If I understand the reply correctly, I consider that it is not entirely correct. It seems to suggest that each and every 3 year period after moving out qualify for PPR. This is not so. Only one final 3 years period is exempted if the property was previously your only or main residence.
Ramnik

Have you ever read s223 (3) (a) TCGA 1992?

A period of absence not exceeding 3 years shall be treated as if in that period of absence the dwelling-house or the part of the dwelling-house was the individual's only or main residence if both before and after the period there was a time when the dwelling-house was the individual's OMR.


I suggest OP should now consult an accountant. You should not be basing your investment decisions on the basis of hearsay on an internet chat forum - where even the various posters cannot agree!

You now know what you need to know; you really should go and find an accountant.

[supasap]

I agree, I will approach an accountant or tax specialist, thought this would be easy but I guess not, suppose that's why we have these professionals. Thanks to all who responded anyway.

[Tax Accountant]

BY GRANGE TO KARONGO: ''Have you ever read s223 (3) (a) TCGA 1992?
A period of absence not exceeding 3 years shall be treated as if in that period of absence the dwelling-house or the part of the dwelling-house was the individual's only or main residence if both before and after the period there was a time when the dwelling-house was the individual's OMR''

REPLY BY KARONGO: Mr Grange, I did say that I may not have understood your reply correctly. Not that it matters, but I nearly edited my reply to put in a caveat that you may have in mind the relief now mentioned by you.

However, referring to the comment by the querist: ''I already have a PPR elsewhere.'', would this not mean that the 3 year relief referred to by you is not available after all?

QUOTE BY GRANGE TO THE QUERIST: ''You should not be basing your investment decisions on the basis of hearsay on an internet chat forum - where even the various posters cannot agree!''

REPLY: I do not agree that you should liken this forum to an internet chat room. I also do not agree with your comments that even the various posters cannot agree with eachother. All we are doing is answering without knowing the full facts and in particularly not knowing what is in the mind of other respondents and what assumptions have been made by them. I would say that this is a healthy debate and the querist has received an enormous amount of professional advice free of charge. He is only picking our brains because it is not costing him anything, but I didn't think for a second that he was going to make final decisions only on the basis of what is said here.

As to the querist, I quote from my last reply: ''It is best to do the sums and see whether it is better to sell without occupying it (eligible for 75% business asset taper relief on all gains) or to occupy as you suggest before selling (eligible for 3 years PPR relief plus some taper relief.'' You are now stretching the respondent's good nature by asking them to do the calculations for you and give it to you on a plate. You should now go and pay for the priviledge of working out the exact figures.

Ramnik

[Grange]

BY GRANGE TO KARONGO: ''Have you ever read s223 (3) (a) TCGA 1992?
A period of absence not exceeding 3 years shall be treated as if in that period of absence the dwelling-house or the part of the dwelling-house was the individual's only or main residence if both before and after the period there was a time when the dwelling-house was the individual's OMR''

However, referring to the comment by the querist: ''I already have a PPR elsewhere.'', would this not mean that the 3 year relief referred to by you is not available after all?


I'm not sure where 223 (3) (a) refers to any other PPR? You have your PPR, and your period of absence not exceeding 3 eyars shall be treated AS IF...


With regard to the overall calculation, can you please give an example of how if he makes the house his PPR - and so 100% exempt from CGT for that period - that the tax bill can be higher than if it is only 75% exempt from CGT for that period - owing to taper?

[Tax Accountant]

I'm not sure where 223 (3) (a) refers to any other PPR? You have your PPR, and your period of absence not exceeding 3 eyars shall be treated AS IF...


With regard to the overall calculation, can you please give an example of how if he makes the house his PPR - and so 100% exempt from CGT for that period - that the tax bill can be higher than if it is only 75% exempt from CGT for that period - owing to taper?

(1) Inland Revenue Help Sheet states; ''Certain other periods of absence from your dwelling-house may be treated as periods of absence if during the period, you have no other dwelling-house eligible for relief AND both before and after the period there is a time when the dwelling-house is your only or main residence.''

(2) I can do no better than quote again from my earlier reply:
''NOTE: I consider you may not be eligible for the valuable lettings relief because you were letting as a business and not as residential accommodation. I also consider that if you occupy it as your residence, you will have a mixed use asset and therefore you will not be eligible for full 75% business asset taper relief on all your gains.''

I did qualify my reply to say that the querist should do his calculations to see which one works out better.

Ramnik

[Grange]

(1) I haven't found that in the legislation yet... perhaps you would be so kind as to point me there if you can.

(2) I think you miss my point. By being his PPR, he will attract CGT at 0% for the last 3 years. Lettings relief would only apply to such period as the house were let, but not a FHL. As a FHL, CGT will be at 10% (ish).

0% is always less than 10%.

[Tax Accountant]

(1) I haven't found that in the legislation yet... perhaps you would be so kind as to point me there if you can.

(2) I think you miss my point. By being his PPR, he will attract CGT at 0% for the last 3 years. Lettings relief would only apply to such period as the house were let, but not a FHL. As a FHL, CGT will be at 10% (ish).

0% is always less than 10%.

Dear Mr Grange,

(1) I do not have any inclination to search the legislation for the details quoted from the Inland Revenue Help SHeets. It is fine with me if you do not accept the position as stated. You may wish to retain counsel to check and locate the legislation and advise you whether or not the legislation supports Inland Revenue view published in their official notes.

(2) I have stated that the querist should do the calculations to see which works out better for him. FHL will not be eligible for lettings relief. Also, Taper Relief is calculated on the basis of the use of the property over the last 10 years (or since April 1998). In particular, by being a mixed use asset, it may dilute the percentage of the total gains to which Business Asset taper Relief applies. Without number crunching, I would not like to be too sure.

Ramnik

[johnj]

I can think of a way that can reduce the CGT to zero. If you would like to contact me I am on the expert list.
regards

John

[Tax Accountant]

John J,

Please let us all in on the secret. This wouldn't be the 'incorporation' route?

Ramnik