Is this picture of CGT on second homes correct?

conrad100

[FONT=&quot]Hi!

I am trying to help someone who has had a long and successful career in property, but this person is not exactly young anymore, they are well in to retirement age and although she is extremely confident in many areas, underlying this, she is increasingly being paralysed by worries surrounding what the tax man will do in respect of capital gains tax. This area is somewhat new to me and I am doing my best to try to help.

In truth there are many CGT questions that arise but I will stick to this one.

She has just moved in November from one property (property A) where she has lived since 1995 as her principal primary residence, to another property (property . She seems intent to rent property A out now.

Now if I understand this, she can elect property A as her principle residence with a letter to HMRC - she must do this within 2 years of the move. So the rules are that the time she was living there as her home is exempt from CGT. In addition, the last 3 years of ownership are also exempt from CGT. I daresay that any period of letting within the next 3 years is exempt so it has neutral impact. In this scenario she would not pay any CGT on the sale of property A.

Doing the above makes sense should property A have a greater capital gain than property B, which is probably the case.

However, there is also the issue of CGT implications for property B. I understand that she could 'flip' the principle residence back to property B where she is now actually living. I am a bit fuzzy about the impact on property B but would she not have the last 3 years of ownership CGT free? Could anyone clarify what the impact would be on property B.

Any other advice or suggestions would be welcome.

Many thanks!

John







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CLAPTON

how long has she owned property B
and what has it's status been since she bought it ?

conrad100

Thanks for your reply.

She has owned property B for 3 months. She lives at property B, it is her new residence.

CLAPTON

Once she lets out property A then it can't be her PPR anymore.

There is no need or indeed purpose in telling HMRC anything about either property.

conrad100

Sorry, I am not sure I understand - this is rather new to me.

So if she elects property A as her primary residence and then afterwards lets out, is that equally a no go? What is the impact of letting out in terms of CGT for property A?

If she were not to let out property A, and sell it taking advantage of it being the principle residence, I am unclear what would be the CGT implications for property B.

Thanks!

CLAPTON

she lived in property A as her PPR (just like I live in my house as my PPR)
neither she nor I inform the HMRC

election is only relevant if you have two genuine homes ... say one in town and one in the country; then you can elect which is your PPR for cgt purposes and flipping etc is relevant.


In her case, property A was her PPR so if she sell within 3 years she has no cgt to pay as the period it was her PPR is exempt plus the last 3 years.
If she sells after three years then it's more complicated but she can claim letting relief (up to 40k) and she has a cgt allowance of 10,600 so whether she has anything to pay depends upon the details.

00ec25

She needs to make up her mind what she wants as you are in danger of letting the tax tail wag the dog through your current obsession with tax implications

Does she:

1) understand what it takes and/or have experience of being a landlord. In blunt terms is she capable of it at her age?

2) is a rental income the best form of investment available to her to give her the additional income to supplement her pension that you seem to imply she needs. Ie is being a LL whilst a pensioner the best investment decision or would the capital released by selling up be better in another investment product generating income other than property rental income

Scenario A
if the intention is to let property A (presumably she is happy to take on the not inconsiderable work involved in being a LL at her age?) then it is as you say exempt from CGT to date and for the final 3 years of ownership under PRR. She would also be entitled to up to a max £40,000 offset against the gain due to her being able to claim lettings relief on top of her PRR., plus of course her personal allowance of £10,600. Add that lot together and her 210k gross gain will almost certainly be eliminated leaving her with little or not taxable gain anyway.

property B is now her main residence. But in terms of flipping between A and B you have not understood that occupation is a pre condition for her being able to claim B is a second home. B cannot be her second home if it is let out to tenants, it is their home! So she can only "flip" during period(s) when B is not let out, that means both periods when there is no tenant in residence and periods when it is not on the lettings market being advertised for let.

Scenario B
she sells off property A within the next 33 months (she moved out 3 months ago so 36 months ie 3 years in total) she has no CGT to pay as it is within the final 3 years. During that 36 month period she can do whatever she wants with the property (including let it out) provided the sale completes by the end of month 36

the status of property B in that case is, as Clapton says, irrelevant

conrad100

Thank you for the response! So if she sells property A within 3 years she pays no CGT. There is no advantage to electing it as the primary residence. Any lettings in this period will have no CGT implications.

Were she to decide to sell property B sometime thereafter, this property would also be exempted on grounds of primary residence? I thought that there might be a conflict as this appeared to be like getting PPR for 2 properties at the same time.

CLAPTON

conrad100 wrote: »

Thank you for the response! So if she sells property A within 3 years she pays no CGT. There is no advantage to electing it as the primary residence. Any lettings in this period will have no CGT implications.

Were she to decide to sell property B sometime thereafter, this property would also be exempted on grounds of primary residence? I thought that there might be a conflict as this appeared to be like getting PPR for 2 properties at the same time.

basically yes

conrad100

thanks 00ec25 and Clapton! I am going to be dragged away for an hour or two. I will read in detail what you say and hopefully I will understand it

Thanks for your time and patience!

Savvy_Sue

conrad100 wrote: »

Were she to decide to sell property B sometime thereafter, this property would also be exempted on grounds of primary residence? I thought that there might be a conflict as this appeared to be like getting PPR for 2 properties at the same time.

I could be about to muddy the waters here, but look at it like this:

On Property A, she has had PPR for as long as she lived in it, and was exempt from CGT had she sold it at any point then. She gets EXEMPTION from paying CGT for 3 years after moving out, not because it is her PPR during those 3 years, but because it is exempt from CGT for 3 years after it stopped being her PPR.

Thus she only ever has one PPR at a time, BUT each PPR has an exemption from paying CGT for 3 years after you move out.

Maybe now you can see why 'flipping' is worthwhile, if you actually have two places to live at once, which she doesn't seem to have.