Capital gains tax on property

PaulCooper

We are in the fortunate position of having 2 properties, we are married and own our primary residence (property 1) as tenants in common. The other property (property 2) we jointly own.
Property 1 has been owned by us for around 25 years and has obviously risen in value quite considerably.
Property 2 has been owned by us for 3 years, it will have risen in value, firstly due to the £50k improvements we have made, but secondly probably due to house inflation.
We probably won't sell either property in the next couple of years.
As it stands when we sell property 2, we are going to take a hit with CGT.
In order to eliminate CGT on the second (and first) property, is it possible for my wife to own property 1 and me to own property 2?.
I'm sure I'm missing something here and that there is a sting in the tax tail, but possibly someone out there can explain if this is possible, if not, is there something else that is tax efficient


Thanks
Paul

booksurr

a married couple can only have one exempt "main residence" at any one time and it must be the same property for both of them, so the idea of a "his N hers" property is a non starter for what you want

as you purchased property 2 more than 2 yeas ago I assume you were not aware of the ability to make a nomination regarding "main residence" and so have not made one? It is now to late to do so as the time limit is strictly enforced.

I assume property 2 is not let and that it is used by you both as a second home?

You cannot "remove/exempt" a property for CGT liability in full (except for your main home) however you can reduce the liability on the second property by either :
a) both living there yourselves in reality so that it becomes your main home. The final 18 months of ownership of a property that was once your main home are always exempt so people do this to get 1.5 years worth of exemption. Obviously there are rules and showing it was your home in actuality is down to a long list of very subjective assessments. Obviously property 12 then loses its exemption in the meantime so playing that game really comes down to is it financially worth it - we can't advise on that as you haven't given any values

marina0403

You don’t usually need to pay tax on gifts to your husband, wife, civil partner or a charity.
You may get tax relief if the property is a business asset.
If the property was occupied by a dependent relative you may not have to pay. HM Revenue and Customs (HMRC) has information on page 7 of its guide on Private Residence Relief.

kidmugsy

PaulCooper wrote: »

Property 2 has been owned by us for 3 years, it will have risen in value, firstly due to the £50k improvements we have made, but secondly probably due to house inflation.

In your shoes I'd find out whether hmrc let you subtract the £50k from the CG.

PaulCooper

Thanks all for replies.
I was aware we could nominate property 2 as our primary residence, but due to the increase in value of property 1, from £120k to £600k it would have worked against us if we had done that.
We probably can offset the £50k spent on renovating property 2 against potential CGT.
Property 2 is not let out, so it's a complete luxury. Guess I knew we'd have to take the tax hit on the chin, but there again you only pay tax on the GAIN, so I shouldn't moan about it!
Sooner or later we'll have to change our primary residence to property 2 as the gain should become fairly large as we bought for £800k, so if anyone knows a legal smart way around this, I'd love to know
Thanks again
Paul

CLAPTON

PaulCooper wrote: »

Thanks all for replies.
I was aware we could nominate property 2 as our primary residence, but due to the increase in value of property 1, from £120k to £600k it would have worked against us if we had done that.
We probably can offset the £50k spent on renovating property 2 against potential CGT.
Property 2 is not let out, so it's a complete luxury. Guess I knew we'd have to take the tax hit on the chin, but there again you only pay tax on the GAIN, so I shouldn't moan about it!
Sooner or later we'll have to change our primary residence to property 2 as the gain should become fairly large as we bought for £800k, so if anyone knows a legal smart way around this, I'd love to know
Thanks again
Paul

you can only elect to change your primary residence if you have already elected one (i.e. within the first two years of owning two places) otherwise it is based on matter of fact as determined by HMRC

booksurr

marina0403 wrote: »

If the property was occupied by a dependent relative you may not have to pay. HM Revenue and Customs (HMRC) has information on page 7 of its guide on Private Residence Relief.

there is little point in you answering tax questions if you haven#'t even read the info yourself (or kept up to date).

- they are already co-owners of each property so gifting between themselves is irrelevant (or do you seriously think that sole ownership would be advantageous??)

they are not and never will be business assets, so why mention that?

Dependent relative relief was abolished for any property purchased after 1988 so you area little behind the times with your advice

booksurr

PaulCooper wrote: »

Thanks all for replies.
I was aware we could nominate property 2 as our primary residence,

but you did not therefore it is now too late and you can never nominate either whilst you remain owners of properties 1 and 3. The only way to start the clock ticking down a further 2 years is to buy property 3 and nominate 1,2 or 3 within 2 years of purchasing 3.

change of primary residence to property 2 now will be based on the subjective tests I mentioned earlier , whether it will be accepted as your main residence will be a "matter of facts"

1. you must both (since you are married) physically move in
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg64465

2. "live" there
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg64435

3. meet subjective criteria to show it is "home"
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg64545

there is no "smart" way around this. You own a (luxury) second "home". You own jointly so each of you will be taxed on your respective share of the gain less your respective person all allowance.

You may save a few £ if one of you is in a lower tax bracket than the other, so that person has more gain at 18% rather than 28% if you can bias the share split to favour the lower person. But if the gain is as big as you imply then presumably each of you will always be into the 28% bracket anyway so it won't make any difference if you have unequal shares anyway.

jimmo

For this purpose, residence is a place where you live.
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg64435
The time limit for nominating which is to be regarded as your main residence doesn’t run from the date of purchase of property 2, it runs from the date that you first had a particular combination of residences.
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg64495
As you spent £50k on improvements it is entirely feasible that you first occupied property 2 quite some time after the date of purchase and you may still be within the 2 year time limit for nomination.
Otherwise buying a third property is one way of acquiring a new combination of residences but it is certainly not the only one. If you let one of the two you already own then whichever one is let will become your tenant’s residence and you will have only one residence. When the letting ceases you will then have a new combination of residences and a new opportunity to nominate.
Whether the hassle is worth the potential tax saving only you can judge but conventional opinion is that it is always worthwhile nominating when the opportunity arises.
The problem with nominating is that you are looking at 2 moving targets. As things stand you will qualify for relief on the final 18 months of ownership of property regardless and, if you are able to nominate property 2 you will similarly qualify for the final 18 months of that as well.
At the present time therefore if you had nominated property 2 say 6 months ago you would need to consider whether the loss of 6 months worth of relief, one fiftieth of the gain over 25 years, was worthwhile in exchange for relief on half the gain on property 2 over 3 years.
The fractions will then change as time goes by.

Savvy_Sue

Am I missing something, or is the obvious thing to do, when the time comes ...

* sell property 1 - no CGT as it is the main residence

* move into property 2 - this now becomes the main residence

* live in property 2 for long enough to minimise any CGT due

But the next piece of advice - to anyone in a position to own two properties - is to get some 'proper' advice, from a suitably qualified person who can ask you all the right questions specific to your situation, and advise accordingly. If the advice turns out to be completely wrong, you are then in a position to sue the pants off whoever gave it to you: a luxury you don't get from an internet forum!

AnotherJoe

Yep I was just reading this thinking "isn't it obvious..." and then Savvy_Sue had put down what seems to be the obvious solution.
You'd need to live there for a considerable time, its been established by case law that even a year neednt be enough, because the test is, "did you do this to evade the tax".
So if you moved in to retire perhaps and lived for several years before deciding to live near relatives (say) then you might be free and clear. If that doesn't work then you'll have to bear up and pay the tax when you eventually do sell.