Buy a house & CGT

djinn69

Hoping someone here can help with a bit of advice.

So, I've managed to get to an age where I feel I really should start to invest in a house, if I leave things too much longer I'll not have the mortgage paid off before I retire!

I am currently living with my partner (we are not married) who owns their own property, it is very nice, in a nice part of town, and we are happy here.

If we choose to continue living in our current house, where we are more than happy, my real question is what are the tax liabilities if I buy a house in my own name, and what options do I have here to reduce any liabilities.

I have never had a house before and can therefore be considered a first time buyer. I guess the options that I have considered are:

1. Buy a house, let it sit empty, say it is my own home - am I correct in thinking this would not incur any capital gains tax should the house go up in value?
2. Buy a house, rent it out - am I correct in thinking that this would incur both income tax on the rental income and CGT on the capital appreciation?

Are there any other options that I may be overlooking (other than to obviously buy a new propery together, but this seems a bit a a shame given we like where we are and it has everything we need)?

I lot of literature mentions CGT on a 'second' property, this would be my 'first' but I am assuming that for the pusposes of tax law would be considered a 'second' to me and my partner?

Many thanks,
DJ

CLAPTON

1. to be exempt from cgt the property needs to be your principal private residence(PPR) i.e you actually have to live there

2. if you rent it out it would be very benefiical for you to have actually lived there for a while as your PPR; this is because once it has been your PPR when you sell you can benefit from the 3 year rule (last three years of ownership is exempt from cgt) and from letting relief

lincroft1710

Buying a house and leaving it empty is not a good idea!

Apart from the social injustice of temporarily removing a property from the available housing stock, you could run the risk of squatters, vandalism, theft, damage to fabric of the property, plus difficulty in finding insurance cover as it's unoccupied.

00ec25

djinn69 wrote: »

So, I've managed to get to an age where I feel I really should start to invest in a house,

so your primary motive is financial investment???????
Have you explored other forms of investment or do you believe that there is nothing better than bricks and mortar?

djinn69 wrote: »

1. Buy a house, let it sit empty, say it is my own home - am I correct in thinking this would not incur any capital gains tax should the house go up in value?

as clapton says this will not work as you must live in it for it to be exempt from CGT

there is nothing stopping you owning it as a pure investment but do bear in minds Lincrofts comments about leaving it empty - have you considered buying a holiday home somewhere else that the two of you could use for that purpose (and possibily let out as well) rather than buying somewhere in your current home town?

djinn69 wrote: »

2. Buy a house, rent it out - am I correct in thinking that this would incur both income tax on the rental income and CGT on the capital appreciation?

you are making a financial investment - if you let it out then yes you will incur income tax and (only) when you sell it, also incur CGT. Both those costs should be factored into your investment appraisal - for example an alternative might be to plough your money into a stocks and shares ISA - that will be tax free (income tax and CGT) but obviously the capital value faces different risks to house prices...

if all you "understand" about investment is housing then put all your eggs into that one basket and let it out so that it is at least making some income - however bear in mind that it may not actually make an overall profit!

djinn69

Thanks you all for you replies, they have certainly given me things to consider.

I did not realise about the home having to be my principal private residence for CGT purposes, and did not realise about the 3 year rule, appreciate the information.

I agree leaving it empty is not the best idea in the world, and yes, I have contributed the full amounts to my S&S ISAs since inception, and am also contributing 20% of my salary into my pension, however I could still potentially be in the situation where I may not own a house before retirement which would be a situation that I would not be comfortable with.

The holiday home is a great idea, definitely worth thinking about.

So thank you all for your comments and suggestions, certainly cause for consideration.

xylophone

Would your partner consider your buying half his/her property so that you own it as tenants-in-common?
- he/she wouldn't pay any CGT as he/she would (I assume) be selling part of the principal private residence and on any subsequent sale you wouldn't either as it would also be yours.

He/she would need to be prepared to buy you out if the relationship ended. You would both take legal advice before entering into any arrangement.