Capital Gains Tax on second property - loophole

Mick70

posted on wrong forum before.
Many now have a second home as a long term investment / holiday rental home , often to boost pension.
I have read that you can avoid CGT if you sell your current home and move into your second home for a period of time, is that a loophole that the govt are likely to close ?

Jeremy535897

For sales before 6 April 2020, you could substantially reduce the gain on a let property by moving into it as your main residence prior to selling it, but now you only reduce the gain looking at actual occupation as your main residence, although the last 9 months of ownership is deemed to be occupied as a main residence if it has actually been occupied as a main residence at some time. If you let a property for 60 months, and then live in it as your main residence for 6 months before selling it, potentially 9/66 of the gain is exempt.

Grumpy_chap

If you move into the property that is BTL, then you can reduce but not avoid CGT.
Say you own the property and let it out for 10 years (120 months)
The you move in and live there for 1 year (12 months)
There is also a "deemed occupancy" period of 9 months
So, you owned the property for 120 + 12 = 132 months.
You lived or deemed to live there 12 + 9 = 21 months, leaving 120 - 21 = 99 months not resident
Property increased in value from £250k to £500k, making a gain of £250k
CGT is (99 / 132) * £250k that is subject to CGT at the appropriate rates.

Please check that the 9 months applies if doing this the way round you are doing it - normally it is referenced the other way round, so

• live at the property
• move out and let
• get 9 months at the end to sell after tenants move out.

If you let, then move in, the 9 months may not be available.  Unless you desperately want to live at the property, moving to save a relatively small proportion of the CGT and then moving again may be more effort than it is worth.  Moving itself is not cheap exercise.

Jeremy535897

Grumpy_chap said:

If you move into the property that is BTL, then you can reduce but not avoid CGT.
Say you own the property and let it out for 10 years (120 months)
The you move in and live there for 1 year (12 months)
There is also a "deemed occupancy" period of 9 months
So, you owned the property for 120 + 12 = 132 months.
You lived or deemed to live there 12 + 9 = 21 months, leaving 120 - 21 = 99 months not resident
Property increased in value from £250k to £500k, making a gain of £250k
CGT is (99 / 132) * £250k that is subject to CGT at the appropriate rates.

Please check that the 9 months applies if doing this the way round you are doing it - normally it is referenced the other way round, so

• live at the property
• move out and let
• get 9 months at the end to sell after tenants move out.

If you let, then move in, the 9 months may not be available.  Unless you desperately want to live at the property, moving to save a relatively small proportion of the CGT and then moving again may be more effort than it is worth.  Moving itself is not cheap exercise.

Yes, in your example (let then move in), the last 9 months is the same period as part of the actual occupation as the main residence, so CGT would be on 120/132 of the gain (I think you also effectively double counted the actual year of occupation in your calculation).

Mick70

Second home bought as a holiday let , at moment has hardly been let out , imagine future years maybe let out for half the year possibly 

Jeremy535897

What matters is your time of occupation as a main residence. Whether let or empty, if it's not your main residence, it's not exempt (subject to the 9 month rule mentioned earlier). There are other rules where absences from a main residence can be ignored, but unlikely to be relevant to you.

Grumpy_chap

Jeremy535897 said:

Grumpy_chap said:

If you move into the property that is BTL, then you can reduce but not avoid CGT.
Say you own the property and let it out for 10 years (120 months)
The you move in and live there for 1 year (12 months)
There is also a "deemed occupancy" period of 9 months
So, you owned the property for 120 + 12 = 132 months.
You lived or deemed to live there 12 + 9 = 21 months, leaving 120 - 21 = 99 months not resident
Property increased in value from £250k to £500k, making a gain of £250k
CGT is (99 / 132) * £250k that is subject to CGT at the appropriate rates.

Please check that the 9 months applies if doing this the way round you are doing it - normally it is referenced the other way round, so

• live at the property
• move out and let
• get 9 months at the end to sell after tenants move out.

If you let, then move in, the 9 months may not be available.  Unless you desperately want to live at the property, moving to save a relatively small proportion of the CGT and then moving again may be more effort than it is worth.  Moving itself is not cheap exercise.

Yes, in your example (let then move in), the last 9 months is the same period as part of the actual occupation as the main residence, so CGT would be on 120/132 of the gain (I think you also effectively double counted the actual year of occupation in your calculation).

Thanks Jeremy, I was unsure about the 9 months if the property is let and then PPR at the end.  It makes sense that the 9 months is for selling post-letting

oldbikebloke

it is not a "loophole"
there is a lot of case law which examines in great detail whether the property is actually occupied as a main residence and as explained above, if it is, then that portion of the ownership gets tax relief. It is why no one pays tax when selling their home, everyone get s the relief for as long as it was their main home. 

in your case, given a history of prior use as a furnished holiday let, if you "move in" and live there then sell you will be a classic instance of exactly the scenarios dealt with in case law 
- does the occupation demonstrate a degree of permanence, continuity or expectation of continuity
- asking how long you have to live there is the most frequently misunderstood question on here. It is never a question of minimum time served. It is always an answer based on the "quality of occupation" not the quantity.
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg64435
If you had 2 properties at the same time, claimed the ex FHL was now your main home, sold it after X months living there and returned to the other property, your claim would probably fail for lack of permanence, continuity or expectation of continuity of the ex FHL as your residence

similarly if you live there for 12 months because it took a long time to sell, you are also open to challenge if, for example, you had moved in and put the property on the market straightaway, as clearly that shows no expectation of continuity. It was just temporary as an attempt at tax avoidance on what had previously never been your home and was done only to try and make it a "home" for tax avoidance 

you can be in temporary occupation, but not in "residence" and it is residence which is the prime basis of the tax relief 

Jeremy535897

Yes, a recent case focused on a builder who did up a property and moved into it with his family, and sold it a few weeks later. They got away with it because they had not sought to market the property, but had accepted an unsolicited offer (after turning down an earlier one). I suspect OP was thinking about the lettings relief issue, which disappeared for sales after 5 April 2020.

Mick70

Reported in the times today that Rishi likely to increase Capital Gains Tax