CGT when owning 2 properties

JRM1977

I have recently acquired a second property in the UK and I am considering selling the first property but I want to be aware of any tax implications before I do. Below is my history and understanding, plus a question or two.

Property 1
- Bought 7/02.
- Primary/only property, used as a home
- Relocated abroad in 3/05
- Property rented, with small voids, 3/05 until 4/14
- I have now reclaimed sole use of this property

Property 2
- Purchased in 9/13 when I repatriated to UK

If I sold Property 1 I think I would incur CGT on any profit less approx 30% (I lived in the property for approx 30% of my ownership) less Letting Relief calculated as the lesser of any gain or £40,000.

However, I understand that I am able nominate which property is my ‘tax-free’ property within 2yrs of the purchase of my second property. Further, I understand that there is no requirement to make this determination based on where one spends the majority of their time.

I have searched but I cannot find an answer as to what would happen to Property 2 if I was to nominate Property 1 with HMRC as my ‘tax-free’ property and then subsequently sell it? Would Property 2 by default then become my ‘tax-free’ property, is there a holding period required to make this so, would property 2 become a taxable property in perpetuity?

Any help would be appreciated.

Thanks in advance,

CLAPTON

neither property is 'tax free' : it may be your PRR but that doesn't make it tax free.

if a property is your PRR for your total period of ownership then there is no cgt liability

if a property is your PRR for only part of your period of ownership then then the cgt rules apply (which may or may not mean no tax)


so if you nominate property 1 as your PRR then property 2 will not be your PRR and so, when sold, will be liable to the cgt calculation




It's outside my knowledge but have you checked on the rules about owning a property when out of the country?

JRM1977

CLAPTON wrote: »

It's outside my knowledge but have you checked on the rules about owning a property when out of the country?

I understand that there is a period of 4yrs if relocated abroad whereby the residence would not attract tax if sold. I have not investigated this aspect throughly yet because I am so far in excess of the threshold (~9yrs).

Based on what you say above, even if I nominate Property 1 as my PRR tax could still be due (subject to profit, less relief etc.) because it was rented for a period.

Furthermore, if I am reading you correctly then it would also mean the Property 2 would not default to my PRR even when it becomes my sole residence.

CLAPTON

PRR is for a period of time;

if that period is less than the full period of ownership then the rules of cgt have to be applied : often there is no tax to actually pay but there might be depending upon circumstances


so if you have two properties and you use them both as your home (i.e. you do not let either of them out) then you can nominate which one is your PRR for the ensuing period;


so yes, even if you now nominate property one as your PRR you may still be liable to pay cgt when you sell.


if you sell property 1 and live in property 2 then property 2 will become your PRR

presumably you are aware that the last 18 months counts as a tax free period and that you have a cgt allowance of 11,000: plus, for property 1 you have letting relief too

00ec25

JRM1977 wrote: »

I understand that there is a period of 4yrs if relocated abroad whereby the residence would not attract tax if sold. I have not investigated this aspect throughly yet because I am so far in excess of the threshold (~9yrs).

Based on what you say above, even if I nominate Property 1 as my PRR tax could still be due (subject to profit, less relief etc.) because it was rented for a period.
yes - CGT liability exists for the proportion of time it was let, nominating it now does not cancel out the fact that previously it was not your PPR.
your liability will be, as you know, minus letting relief and the personal allowance

Furthermore, if I am reading you correctly then it would also mean the Property 2 would not default to my PRR even when it becomes my sole residence.
if you do not make a nomination within 2 years (or if either property is again let) then which one is your main home is based on the facts of your occupation

if you do make a nomination by 31/8/15 (2 years) then by default that is your PPR and the other one becomes liable. The on going condition being that the nominated property must be available for your use even if you do not live there as a main residence, ie it cannot be let and simultaneously remain a nominated PPR

based on your statement that you repatriated in Sept 13 then you are now liable for UK tax and anything to do with selling whilst based overseas for the previous 9 years is now too late

JRM1977

Thanks everyone, very helpful so far.

Now that I know where I stand in terms of liability the question becomes, what can I consider to be costs when calculating profit?

The HMRC isnt very clear with a list that is not definitive. Sadly, as a new user I am prevented from posting the link to the page in question.

It appears that I can deduct costs incurred in the purchase and sale inc. Stamp Duty and home improvements. But what about mortgage interest, and lease payments if these were for matters other than general maintenance?

jimmo

JRM1977 wrote: »

I understand that there is a period of 4yrs if relocated abroad whereby the residence would not attract tax if sold. I have not investigated this aspect throughly yet because I am so far in excess of the threshold (~9yrs).

This, it seems to me, is the thing you should really concentrate on.
If you have a “period of absence” it is potentially far more powerful than you seem to think and could entirely wipe out any liability for you.
However you do need to establish a period of absence and your purchase of property 2 on repatriation throws that into doubt.
In its simplest form a period of absence requires you to have lived in the property, left it and returned to live in it later.
As things stand you appear to have left property 1, moving abroad, but did you return from abroad and live in property 1 or did you move directly into property2?
If you did not return to live in property 1 it will then be necessary to examine whether the reason for not returning there is related to you subsequent employment.
If you can establish a period of absence and you rented your accommodation whilst working abroad then the whole period of absence will qualify for relief.
So, this could be a simple case of no liability to Capital Gains Tax, or trawling through the potential alternatives such as letting relief and maybe, just maybe, which property you should nominate if there was a period of time when you actually lived in both properties.
I find this the most useful guidance.
http://www.hmrc.gov.uk/helpsheets/hs283.pdf

JRM1977

Thanks Jimmo - That factsheet was very helpful.

It appears that I can claim a “Period of Absence” for the full time that Iwas away under bullet on page 5:

"absences during which you are in employment and all your duties are carried on outside the UK"

I am able to maintain this through my return to the country in 7/13.

Thereafter I can either make the case that I was unable to return to Property 1 (Brighton) due to work and consequently purchased Property 2 (Manchester) and extend the Period of Absence or I can simply accept the potential for CGTon the proportion of time from 7/13 onwards noting that this will likely be well below my CGT threshold for the year.

This would appear to apply provided that Property 1 is my "only or main residence" as defined on page 3. Referring back to page 3 and I am allowed to nominate Property 1 as my primary residence due to the very recent purchase of Property 2.

jimmo

jimmo wrote: »

As things stand you appear to have left property 1, moving abroad, but did you return from abroad and live in property 1 or did you move directly into property2?

Did you miss that?

JRM1977

I did not move into property 1 upon my return as my work did not take me back to Brighton. I stayed in temp accommodation in the North West (7-9/13) before purchasing property 2 near Manchester (9/13).

Furthermore, the property had tenants and 4/14 was the month that I reclaimed possession. I am unsure if this is relevant, and it was work that took me to Manchester, but presumably the spirit of the law is that I take possession when available, not upon the first day?

My reading of the factsheet does not require that I return to the property although I accept it would be more cut and dry if that was indeed the case.

jimmo

I needed that information for a number of reasons which will hopefully become clear as we work through this.
Firstly, there is no question of you nominating which property is or was your main residence. In this context residence means a place where you live so property1 was your only and main residence from 7/02 to 3/05.
From 3/05 to 7/13 your main residence was abroad. Incidentally I have assumed that you did not buy your residence abroad but did mention that in my post at #7.
From 7/13 to 9 /13 you were in temporary accommodation.
From 9/13 your main and only residence is property 2.
Therefore there was no period when you had 2 residences and no scope for you to make a nomination.
I see no problem with establishing a period of absence from property 1 because of your work location but it also has to be remembered that one of the conditions for there to be a period of absence is that you owned no other dwelling house eligible for relief.
Therefore your period of absence from property 1 ended when you moved into property 2.
Now we have a period of absence from3/05 to 9/13.
Of that, the period from 3/05 to 7/13 qualifies under (b) employment abroad. The 2 months from 7/13 to 9/13 qualify under either (a) or ©. It doesn’t matter which.
Therefore the whole period of absence fro 3/05 to 9/13 is regarded as if you were occupying property 1 as your main residence.
In addition, because property 1 has been your main residence for some of your period of ownership, you also qualify for relief for the final 18 months of ownership.
HS283 refers to a final period of 36 months on page 7 at the second bullet point under “Calculating the gain where only partial relief is due. That is correct for 2013/14 but the law has changed to 18 months.
So, if you sell property 1 within 18 months of moving into property 2 you will be exempt from Capital Gains Tax If you retain property 1 longer than that it will become a bit of a moving target.
The final 18 month of ownership will move thus creating a non exempt period from 9/13 to the start of the final 18 months of ownership. Then you would need to consider lettings relief.