Changing to Buy-to-Let to avoid CTG tax on the original gain

shan70

Hi, 

I was by chance landlord since 2007 and bought another property in 2014 and using it as the main residence. Now due to job change I am looking to buy a property near to my job. 

I have sold 2007 property that I was renting out. I understood, I have to pay capital gain on it - no problem with that, as the gain is only (268 - 185)K in 15 years. 

Now, I am worried about paying CTG on the current main residence which I am going to let-out (with Bank's consent). When sell it in future. There are huge gain (minimum 80% in 7 years) on this property. And it is bigger and better property in Windsor. 

My point is, once I buy another property which will be my main residence, my current residence will become 2nd property. And in future when I try to sell the 2014 property, I may have to pay huge CTG. Though the gain is already there before I start renting it out. Bank said they will give consent to rent out but the current lender don't offer buy-to-let

Should I change the current main residence to buy-to-let before registering the new property? I don't mind paying CTG on the future gain from 2021 onward. But paying CTG on the gain between 2014-2021 will not be right.

Caz3121

shan70 said:

 I don't mind paying CTG on the future gain from 2021 onward. But paying CTG on the gain between 2014-2021 will not be right.

have you worked out roughly what the CTG would be by the time you account for Private Residence Relief?
https://www.tax.service.gov.uk/calculate-your-capital-gains/resident/properties/

you could run some different scenarios with different length of ownership and selling price

changing mortgage type will not change the date you acquired the property for future calculation

[Deleted User]

shan70 said:

Hi, 

I was by chance landlord since 2007 and bought another property in 2014 and using it as the main residence. Now due to job change I am looking to buy a property near to my job. 

I have sold 2007 property that I was renting out. I understood, I have to pay capital gain on it - no problem with that, as the gain is only (268 - 185)K in 15 years. 

Now, I am worried about paying CTG on the current main residence which I am going to let-out (with Bank's consent). When sell it in future. There are huge gain (minimum 80% in 7 years) on this property. And it is bigger and better property in Windsor. 

My point is, once I buy another property which will be my main residence, my current residence will become 2nd property. And in future when I try to sell the 2014 property, I may have to pay huge CTG. Though the gain is already there before I start renting it out. Bank said they will give consent to rent out but the current lender don't offer buy-to-let

Should I change the current main residence to buy-to-let before registering the new property? I don't mind paying CTG on the future gain from 2021 onward. But paying CTG on the gain between 2014-2021 will not be right.

That’s how CGT works though. The gain is based on the price you originally purchased the property for and the price at which you eventually sell. You will get PRR for the time the property was your only or main home plus the final 9 months of ownership under the current CGT rules. 

Consent to let or buy to let will make no difference whatsoever on your final CGT bill. 

theartfullodger

I've never signed a tenancy agreement or found a new tenant "by chance".  How is that done please?

grumiofoundation

shan70 said:

Hi, 

I was by chance landlord since 2007 and bought another property in 2014 and using it as the main residence. Now due to job change I am looking to buy a property near to my job. 

I have sold 2007 property that I was renting out. I understood, I have to pay capital gain on it - no problem with that, as the gain is only (268 - 185)K in 15 years. 

Now, I am worried about paying CTG on the current main residence which I am going to let-out (with Bank's consent). When sell it in future. There are huge gain (minimum 80% in 7 years) on this property. And it is bigger and better property in Windsor. 

My point is, once I buy another property which will be my main residence, my current residence will become 2nd property. And in future when I try to sell the 2014 property, I may have to pay huge CTG. Though the gain is already there before I start renting it out. Bank said they will give consent to rent out but the current lender don't offer buy-to-let

Should I change the current main residence to buy-to-let before registering the new property? I don't mind paying CTG on the future gain from 2021 onward. But paying CTG on the gain between 2014-2021 will not be right.

There is a very easy way to avoid paying capital gains tax completely.


Don't rent it out, sell it.

shan70

Thanks for all good suggestion. I found those very useful.

So, it don't make sense to try to go to buy-to-let before taking another mortgage. We are in higher tax bracket, so I think with that respect we should change it to a buy-to-let at a later date. Is it correct? This is bit diversion from original topic.

"Don't rent it out, sell it" - that is good point as well. But the house I'm talking about have further potential even after the current gain, it could become 2 properties. It have a long garden (approx. 120m) with another cul-de-sac road end, at the other end. There were offers from the developers but it fell out as the highest bidder wanted a covenant. Which is to run the supply lines through the main part instead of the access road in back. I am considering to get planning permission myself then sell it off as just land or, develop. Then sell 2 parts or rent-out both kind of forever.

Is there any option, that I defer the sell of the current main residence (say for 2 years) and not pay the CTG? While I carry on taking another mortgage. 

grumiofoundation

shan70 said:

Thanks for all good suggestion. I found those very useful.

So, it don't make sense to try to go to buy-to-let before taking another mortgage. We are in higher tax bracket, so I think with that respect we should change it to a buy-to-let at a later date. Is it correct? This is bit diversion from original topic.

You will need either to remortgage to a Buy to let mortgage  or get consent to let before you can rent it out.  
If you are higher rate tax payers the tax treatment of BTL is less favourable to you (as you can't offset interest any more and tax credit is only for 20%). 

As opposed ti tax relief on pension which is very attractive for 40% tax payers  or ISA which at leats have no CGT to pay (pay in 40k per year across 2 people)

"Don't rent it out, sell it" - that is good point as well. But the house I'm talking about have further potential even after the current gain, it could become 2 properties. It have a long garden (approx. 120m) with another cul-de-sac road end, at the other end. There were offers from the developers but it fell out as the highest bidder wanted a covenant. Which is to run the supply lines through the main part instead of the access road in back. I am considering to get planning permission myself then sell it off as just land or, develop. Then sell 2 parts or rent-out both kind of forever.

Will your mortgage lender allow you to make these changes, i.e split the title?
(Also surely the potential would be factored into the price?)

Is there any option, that I defer the sell of the current main residence (say for 2 years) and not pay the CTG? While I carry on taking another mortgage. 

I don't understand this.
If you have always been resident in property - no CGT to pay.
If you rent out then you have to pay CGT on a proportion of the gains - detailed in link above.
Are you saying hold for 2 years empty? In this case can you afford (in banks eyes) 2 mortgages?

shan70

"You will need either to remortgage to a Buy to let mortgage  or get consent to let before you can rent it out.  
If you are higher rate tax payers the tax treatment of BTL is less favourable to you (as you can't offset interest anymore and tax credit is only for 20%). 

As opposed ti tax relief on pension which is very attractive for 40% tax payers  or ISA which at leats have no CGT to pay (pay in 40k per year across 2 people)"

Thanks, I need to investigate and understand more on this topic. I thought BTL or not all rental income can't offset the interest anymore which was introduced step-by-step last few years.  

"Will your mortgage lender allow you to make these changes, i.e split the title? 
(Also surely the potential would be factored into the price?)"

It should be ok as the developer offered took the process quite far. Estate agents assessed and suggested that the original house price will be the same with or without the access land. It will still have 30m of Garden in the back.

"I don't understand this.
If you have always been resident in property - no CGT to pay.
If you rent out then you have to pay CGT on a proportion of the gains - detailed in link above.
Are you saying hold for 2 years empty? In this case can you afford (in banks eyes) 2 mortgages?"

To clarify, I understood that I can get back the 3% extra SDLT, if I sell the house within certain period(?). I would like to know whether any similar kind of time frame is there for CTG as well. I am not planning to keep the house empty.

doodling

Whilst I am not an expert, if you really want to keep it and let it out then presumably a sale to a limited company you create to run your property business would mean the CGT is only calculated from today rather than from when you bought the house.  There may be other benefits to running your business via a limited company as well...

Note that this doesn't avoid future taxation as CGT will be due on the shares in your limited company when you sell them, or other taxes will be applicable on profits, dividends and income from the company.

I suggest you seek professional advice.

AdrianC

shan70 said:

Is there any option, that I defer the sell of the current main residence (say for 2 years) and not pay the CTG? While I carry on taking another mortgage. 

Ignore mortgages, they're irrelevant to CGT.

It's very simple - you pay CGT on the capital gain in value of things you own, over the time you own them. Houses are just one of the things that are liable.

BUT... when a house is your home, there's an exemption to having to pay CGT.

If you live in a house for some of the time you own it, and don't live in it for the rest, then the gain is taxed according to the proportions of time (plus you're allowed an extra nine months).

If you sell the house to a limited company, that company will pay SDLT on their purchase from you. Yes, even if you own the company.