Income Tax on second home (profit from sale)

scope · 16 December 2005 at 1:18PM

Hi,

Althought this isnt a law forum, im hoping somebody can shed some light on the following situation:

If somebody bought a house for say 100k X years ago, and this is now worth say 200k, if we sell this house and move on the profit (100k) is tax free as its the main property.. That bit is fine..

Now lets say instead of selling the property to buy another house we hold on to the first property (at the time of moving out is worth 200k), effectly making it our second property (which is rented out)..

Question is, if we in X years decide to sell the second property (say now worth 250k) without having lived in it, will we have to pay tax on the full profit (150k), or do we pay tax on the profit since moving out? (50k)..

The latter seems the sensible way, otherwise we will effectivly loose what was 100k tax free. But knowing the government you'll probably have to pay for tax on the lot, even thought 100k WAS taxfree when you moved out..

Any thoughts on this?

Also, are there ways of getting around paying tax on second house?

Bermuda_John · 16 December 2005 at 1:53PM

You will be subject to Capital Gains Tax on the sale of your 2nd house as it is not your Principal Private Residence (PPR).

The "profit" from your sale is taxable at 10, 20 or 40% but this is calculated on the amount after taking advantages of some reliefs.

If it is joint owned then you can offset your annual exemption for both people around about 8k each at present and you then have taper relief which reduces the gain further depending on how long you have lived there.

You then take this amount and multiply it by the relevant tax rate to get the amount you have to pay to the taxman.

The only way to get round it is to live in it for about 3 - 6 months before you sell it and declare it as your PPR therefore paying no tax.

The only problem with this is you will still have the other property laying vacant.

John

Bermuda_John · 16 December 2005 at 1:55PM

Put some numbers as an example:

Cost: 200,000

Sale: 320,000

Profit : 120,000

Less exemption : 16,000

gain: 104,000

taper relief at 60%

Chargablr gain of 62,400 at say 40%

Tax payable = 24,960!!

This is a very very rough guide.

scope · 16 December 2005 at 3:03PM

Bermuda_John wrote:

You will be subject to Capital Gains Tax on the sale of your 2nd house as it is not your Principal Private Residence (PPR).

If it is joint owned then you can offset your annual exemption for both people around about 8k each at present and you then have taper relief which reduces the gain further depending on how long you have lived there.

The only way to get round it is to live in it for about 3 - 6 months before you sell it and declare it as your PPR therefore paying no tax.

Thanks for your input.. Taper relief is atleast something, however, it seems to only go up to 40% relief for privat individuals.

Regarding the 3-6 months.. Are you sure this is the case? If it was then surely everybody would leave the property empty for 3-6 months claiming to live there. OK, you would loose 3-6 month income (or mortgage), but if it saved you thousands in tax it would be worth it.

silvercar · 16 December 2005 at 3:06PM

Roughly, if you live in a house as PPR for 10 years and then live elsewhere for 5 years you pay tax on a proportion of the profit you made. The proportion of the profit is calculated as the time you lived in it + 3 years. So in this case 10+3=13: you would pay tax (at your marginal rate, after allowing for capital gains allowances of about £8k each) on 2/15ths of the total profit (after allowing for costs). there is also tapering relief which would reduce these figures further.

Omertron · 16 December 2005 at 3:57PM

Bermuda_John wrote:

The only way to get round it is to live in it for about 3 - 6 months before you sell it and declare it as your PPR therefore paying no tax.

According to the nice lady at the tax office I called when I was in a similar situation, as long as you have lived in the house as your primary residence within the last 3 years, you'll be exempt from CGT. Asked how long I had to live there, she said normaly 3 months or more, though they don't normally check. As landlord, if you have any utility bill that should suffice.

I'd suggest a trial seperation with your partner just prior to selling the house

Cook_County · 16 December 2005 at 4:39PM

Omertron is suggesting something of high risk.

The test is whether or not the property was your main residence. This is a question of fact, not time of occupation.

It is possible to elect one residence as a main residence if you have two. I suggest taking advice from a Chartered Tax Adviser. These are fairly standard tax planning techniques, but you need someone to give you an opinion you can rely on should your tax return be audited.

scope · 17 December 2005 at 8:31AM

Thanks for your feedback.

Its nice to know what my options are should I buy a second home.

Income Tax on second home (profit from sale)

Comments

Confirm your email address to Create Threads and Reply

🚀 Getting Started

Categories

Is this how you want to be seen?

Get our FREE Weekly email full of deals & guides - and it’s spam-free