CGT on second home ?

silver-oldie

Sorry if this has been asked before, have looked but cannot find answer.
We have two properties and owing to age and health have now decided to sell second property but it will be subject to CGT.

Second property has never been rented out.

We are retired and so could easily live in second property, but for how long until it would be seen as our prime home?

Could we then move back to our original home with no problems if we ever decide to sell?

Thank you

p00hsticks

silver-oldie wrote: »

Sorry if this has been asked before, have looked but cannot find answer.
We have two properties and owing to age and health have now decided to sell second property but it will be subject to CGT.

Second property has never been rented out.

We are retired and so could easily live in second property, but for how long until it would be seen as our prime home?

Could we then move back to our original home with no problems if we ever decide to sell?

Thank you

I'm sure an expert will be along soon, but for what my non-expert opinion is worth, I don;t think it works as you appear to think it will.

If you move into the second property, then broadly speaking however long you live in it, only the period in which you live in it will be exempt from CGT - there will still be a potential CGT liability for all the time you weren't living in it.

So very roughly speaking, the CGT calculation looks at how many months you have owned it, how many months you have actually lived in it, and the difference in price between what you bought it for and sell it for.

And the same for your first house - if you move out of it for a period you are creating a potential CGT liability on that property too.

Pennywise

p00hsticks wrote: »

If you move into the second property, then broadly speaking however long you live in it, only the period in which you live in it will be exempt from CGT - there will still be a potential CGT liability for all the time you weren't living in it.

Also, it's quality not quantity. To have any chance of claiming house 2 is your "home" you have to really "live" with an intention of permanence. It's not as simple as saying "3 months", "6 months", "2 years". The burden of proof is more than mere time.

At the very simplest level, you have to have the "paper trail", i.e. change your voters registration to house 2, change your car registrations and driving licence addresses, change addresses for all your bank accounts, pensions, investments, register for occupied council tax at house 2 and change council tax for house 1 to unoccupied.

HMRC have also used other tests in recent cases, such as looking at where your "social life" is based, i.e. where you hold birthday parties, where you meet friends, where you go to clubs/societies. They've also been known to look at utility bills to check whether you're using enough power at house 2 to back up your claim you're living there (i.e. utility bills for house 2 would have to be a lot more than house 1 etc).

So, you can't just pretend to be living in house 2 - you have to give HMRC no grounds to challenge. If at all possible, some pretty good evidence would be renting out house 1 - on the grounds if someone else is renting it, you couldn't possibly be living there.

But as said above, all you're going to gain is main residence relief for the period you're living in it. So in very simple terms, if you've owned it for 19 years and move into it for 1 year and then sell it, you're main residence relief if only going to be 1/20th of the total gain, so probably not worth going to all that hassle to "move" only to have to "move" back again afterwards.

(The fact you move back again after selling it is also a red flag to HMRC and a prompt for them to look at it in more detail to check whether you're claim to live there was real).

Great shame you didn't take advice when you first bought it. Had you made a "main residence election" when you first had the choice of 2 homes, you could have "flipped" which was your "main residence" for capital gains tax purposes over the years to have gained a better proportion of the gain being covered by main residence relief and then you wouldn't have had to "move in" from one to the other. The election is aimed at your circumstances, where basically you have two homes and live in both for various periods (i.e. never let out one or have it otherwise unavailable for you).

silver-oldie

Thank you so much for your help and advice.
Do you have to make a 'main residence election' on purchase?
We bought house1 in 1982 and house2 in 2013.

kidmugsy

silver-oldie wrote: »

We bought house1 in 1982 and house2 in 2013.

If house 2 is the one you propose to sell, will it have made much of a capital gain in 5 years? I suppose that depends on where it is. And how well it has been maintained. Can you tell us how big a capital gain you expect it to make?

00ec25

silver-oldie wrote: »

Thank you so much for your help and advice.
Do you have to make a 'main residence election' on purchase?
We bought house1 in 1982 and house2 in 2013.

you had to have made an election within 2 years of "having a particular combination of residences"

you are 3 years too late... so in your case which is your main residence for tax purposes is now based on "a matter of facts" covering the issues already mentioned above.

silver-oldie

kidmugsy wrote: »

If house 2 is the one you propose to sell, will it have made much of a capital gain in 5 years? I suppose that depends on where it is. And how well it has been maintained. Can you tell us how big a capital gain you expect it to make?

Yes thinking of selling house 2
Bought for £250K now valued at £360-£370K it's jointly owned

00ec25

silver-oldie wrote: »

Yes thinking of selling house 2
Bought for £250K now valued at £360-£370K it's jointly owned

so gross gain: 370 - 250 = 120
deduct a) legal fees and SDLT paid on purchase, say 5k
deduct b) legal fees and EA fees paid on sale, say 5k
finger in the air say a)+b) = - 10k
net gain 110

2 owners, assumed to be 50/50 in absence of other info, so 55k net gain.

owner 1: 55 - personal allowance 11.3 = 43,700 taxable gain
worst case scenario all at 28% = 12,236 tax to pay.
Cash available from which to pay that tax: 370 sale price - selling costs (say 5k) / 2 = 182,500. Cash trousered 182,500 - 12,236 = 170,264

owner 2: 55 - personal allowance 11.3 = 43,700 taxable gain
worst case scenario all at 28% = 12,236 tax to pay
Cash available from which to pay that tax: 370 sale price - selling costs (say 5k) / 2 = 182,500. Cash trousered 182,500 - 12,236 = 170,264

all figures using 17/18 tax allowances

silver-oldie

House owned 50/50
we pay tax at basic rate

00ec25

silver-oldie wrote: »

we pay tax at basic rate

that is not the determinant

you pay CGT @28% on the amount of total "income" over the basic rate income tax band of 33,500 (@17/18 tax rate)

total "income" for CGT purposes comprises:
all income subject to income tax (salary, interest, dividends etc etc) less 11,500 income tax (PA) personal allowance PLUS net taxable CGT gain (ie gain after deducting the CGT allowance 11,300)

so suppose you have 25,000 earnings, deduct 11,500 PA = 13.5 subject to income tax, so a basic rate income taxpayer. BUT
your CGT gain in my example is 43,700 so, total income at higher rate of CGT is 13.5+43.7-33.5 = 23.7

so in detail you'd pay CGT of:
@18% 33.5-13.5= 20 x 18% = 3,600
@28% 43.7 - 20 = 23.7 x 28% = 6,636
total CGT payable 10,236

silver-oldie

Thank you to everyone, you have been so helpful, much appreciated.