Capital Gains on Second Property

by **arthurv** on Wed Jan 18, 2012 12:00 am

My wife and I have owned a own second property for approx 20 yrs. Apart from short periods of time when we stayed at the property while work was taking place, the property has been mainly occupied by tenants, though for the last few months my daughter has been living there as it's convenient for her work.

We are now giving serious thought to selling and would appreciate some advice on potential CGT liability. The net gain would be in the region of £125k.The costs of buying/selling and repairs would perhaps total £5k. My income presently is around £31k and my wife's around £10k. Any help on how much roughly we would each be liable would be much appreciated.

There may be a possibility for me to take early retirement in a couple of years time on a pension of approx £11k. If I deferred the sale until then, can anyone please tell me what the diffence would be if we sold then instead ? Many thanks.

by **King_Maker** on Wed Jan 18, 2012 7:36 am

Current CGT rates are 18% and 28%, depending on the level of one's income.

Would living in the property for a significant period be an option? And/or selling your current home?

by **arthurv** on Wed Jan 18, 2012 11:26 pm

Thanks for your response. Yes I suppose it 's possible that my wife and I could move into the property as it's currently vacant. It wouldn't be possible to sell my main residence as my adult daughters would continue to be living there. If we were to move into the second property how long would we need to reside there, and would it be advisable to set my daughters up as formal tenants of the main property ? How would this arrangement affect any cgt liability

by **King_Maker** on Thu Jan 19, 2012 8:53 am

Unfortunately, the CGT legislation does not provide any minimum time for PPR relief to apply. The courts have indicated it's quality rather than quantity. IMHO, the longer the better - 12 months is unlikely to be challenged by HMRC.

The advantage of doing so is obtain the exemption for the last 36 months of OWNERSHIP - plus Lettings Relief of (up to) £40,000 per owner.

Have you read the Help Sheet HS283? It's on HMRC's website.

www.hmrc.gov.uk/helpsheets/hs283.pdf

by **arthurv** on Sat Jan 21, 2012 2:00 am

Thanks KM. As the flat is presently unoccupied, my wife and I are now seriously considering your suggestion about making this our main residence. Presumably we would require to notify hmrc of this fact and also our employers; council tax; utilities; banks etc. The 'second property' flat is not big enough for us all the family, so would it be ok if my adult daughters continued to remain living in the 'family home'. Any idea how much this would save us in cgt? I appreciate your help with this matter.

by **King_Maker** on Sat Jan 21, 2012 9:23 am

Yes, it is important that the flat does become your new home - so you should everything that is normally involved with a permanent move (like the examples you gave).

If your old home is still capable of being a residence of yours - e.g. because your daughter does not have a tenancy agreement, then you have 2 years from the date you acquire 2 (or more) residences to nominate to HMRC which one is your main residence for CGT purposes.

Please note that, as a married couple can only have a single main residence, your old home could lose some of its CGT exemption. This may not be the case if the flat is sold within 3 years.

I would suggest that such a decision is not undertaken lightly.

by **mullet** on Sat Jan 21, 2012 9:31 am

Be very careful here ... it is not as simple as moving into the second property, even if you notify all the bodies that you mention (and more). If you move from your current property (which I assume is a house) to the flat and then back to the house in a few years - HMRC may well spot it. Tax Inspectors are not stupid, and they have various tools available to identify situations such as this. Temporary occupation does not amount to "residence" for the purposes of TCGA 1992, and how obvious is moving from property A to property B and then back to property A? Particularly if property B is not actually suitable or of an adequate size for you.

Out of interest, how far apart are properties A & B? And (imagine you are having to explain this to HMRC), precisely why are you planning to move to property B apart from avoiding CGT?

by **maths** on Sat Jan 21, 2012 1:43 pm

Assuming wife acquired your interest and sold now her CGT liability would roughly be (125K - 10K) = 115K

35K @ 18% and 80K @ 28% ie 28,700 (quite a bit).

A move as KM and Mullet indicate should not be contemplated lightly although from a CGT perspective it is possible although HMRC are aware of people attempting to argue a flat/house is their main residence and thus CGT exempt.

There is no minimum period of occupation required but in practice on your facts I would think a 3 year horizon should be contemplated (12 months is too provocative).

As an aside, King-Maker, and just to be a clever-dick (!):

If your old home is still capable of being a residence of yours

the two year time limit only applies if de facto two properties are residences; "capability" doesn't count.

by **maths** on Sat Jan 21, 2012 1:44 pm

Forgot to add "Beware the tax tail wagging the dog".

by **mullet** on Sat Jan 21, 2012 1:58 pm

There is no minimum period of occupation required but in practice on your facts I would think a 3 year horizon should be contemplated (12 months is too provocative).

And if you can combine this with NOT moving back to your current home, then you will be much safer. I am still nervous about people moving into an intermediate property (even for several years) and then moving back from whence they came. It is too obvious. OP - please state how far apart the properties are. That is not fundamental, but it may be an important factor. And as Maths said "Beware the tax tail wagging the dog" ... hence my question about your non-tax reasons for moving to the flat. If there are any.