Owning 2 houses & CGT rules?

mcooke999

My parents bought their current home about 25 years ago. It was rented out for a period lasting about 3 years from 2010 - 2013 (in that period they moved out and lived somewhere else) but they then moved back in again afer 2013 and have lived in it again ever since.

About 3 years ago they bought another property as a project which is now nearly completed. They want to move in to this new house and sell the one they live in now.

They are worried if they move in now and it takes a long time to sell their current home then they may end up having to pay CGT as it would no longer be their main address? Is this correct and if so would it not be better for them to wait until their current house has sold before they actually move into the new one.

They are in the fortunate position of not needing to move in to the new home straight away if this helps from a CGT point of view.

Also, apart from CGT are there any other rules or issues to be aware of?

Jeremy535897

The 3 years they let the property may be covered by the rule that ignores periods of up to 3 years where the house is occupied as the main residence both before and after the let period. The last 9 months of ownership are treated as occupation as a main residence. They are out of time to choose which house is their main residence while they own both, so it will be decided on the facts.  If they sell the house after say 26 years and 25 years 9 months are exempted, the remaining gain (1/104 of the total in this example) may be covered by annual exemption, depending on the values.
Owning two house has implications for council tax and stamp duty.

mcooke999

Thanks. So if I've understood it correctly, ignoring the short period it was rented out for, they will only start to incur CGT charges after a period of 9 months after they have moved out? And that charge is calculated on a pro rata basis based on the number of months/years it is no longer their primary home after the 9 month period? ... 
I assume if this amount is less than their annual CGT allowance then they wouldn't have to pay anything? If this is correct, are they able to combine their CGT allowances as it is held in their joint names?

Also, are they able to offset any money they've spent on the property over the years against the capital gain they've made? If so what is allowed to be deducted?

Jeremy535897

If the house is owned jointly, two annual exemptions are available (unless used against other gains). If there is a capital gain, as it is a sale of a residential property, a return will need to be filed and tax paid within 30 days of completion.

Improvement expenditure (for example an extension) is deductible, as are acquisition costs (stamp duty and legal fees) and selling costs (estate agent and legal fees). Maintenance is not deductible. It would be helpful to have invoices.

glennevis

It's worth noting, if it helps, that you can nominate your change of principal residence by writing to HMRC and the date of change can be backdated up to two years. They write back to you to confirm the date.

mcooke999

Thanks everyone. So by the sounds of it, they won't end up paying any CGT. The property was bought back in the 90's for circa. 90k and it's probably worth about £425k now. In that time though they've spent a lot of money on it with a couple of extensions and then renovating it when they moved back in after it was rented out.

Was I right about the pro rata part of calculating the CGT allowance? As in once 9 months have passed since you moved out the CGT starts to accrue but only on a pro rata basis, rather than it being a cliff edge date that you'd suddenly owe a fortune in CGT?

Jeremy535897

glennevis said:

It's worth noting, if it helps, that you can nominate your change of principal residence by writing to HMRC and the date of change can be backdated up to two years. They write back to you to confirm the date.

This has to be done within 2 years of acquiring the second property and it has already been owned longer than that.

mcooke999

Jeremy535897 said:

glennevis said:

It's worth noting, if it helps, that you can nominate your change of principal residence by writing to HMRC and the date of change can be backdated up to two years. They write back to you to confirm the date.

This has to be done within 2 years of acquiring the second property and it has already been owned longer than that.

Does this still apply even if the 2nd property isn't a house? The reason I'm asking is in my parents case, the 2nd property is/was a Methodist chapel which they have now converted to a house. So does this 2 year rule start from the moment you purchase the property regardless of what type of property it is or does it only count from when it's use has been changed officially to a house?

Jeremy535897

The law says in section 222 TCGA 1992::

"(5)So far as it is necessary for the purposes of this section to determine which of 2 or more residences is an individual’s main residence for any period—

(a)the individual may conclude that question by notice to the inspector given within 2 years from the beginning of that period but subject to a right to vary that notice by a further notice to the inspector as respects any period beginning not earlier than 2 years before the giving of the further notice,

(b)subject to paragraph (a) above, the question shall be concluded by the determination of the inspector, which may be as respects the whole or specified parts of the period of ownership in question,

and notice of any determination of the inspector under paragraph (b) above shall be given to the individual who may appeal to the General Commissioners or the Special Commissioners against that determination within 30 days of service of the notice."

I think it has to be a "residence" for the period in (a) above to start, and if it is right to make an election, there is no harm in trying.

mcooke999

Thanks but I'll be honest, I haven't got a clue what any of that means 🤣
Also, I'm trying to find more information about lettings relief for the period when they rented it out. Is there any specific rules regarding it if it's 3 years or less?

Jeremy535897

As I said, I think it has to be a residence to start the 2 year period. I would guess that is when building control sign off and council tax starts.

You can forget lettings relief as that no longer applies (except for living with lodgers) for disposals after 5 April 2020. The 3 years is an" absence for any purpose" test.