Avoiding CGT on second property

Aberdeenangarse

Fairly certain I know the answer to this, but need confirmation.

Cousins son has a second property (BTL) which he purchased four years ago. Mortgage came up for renewal and rental payments are now less than mortgage so has had to sell. He’s made a reasonable profit, excess of £100k, and reckons he can avoid paying CGT by moving into the BTL whilst it’s being sold, and nominating it as his primary residence. Once sold he will then move back to his original ‘home’ He wasn’t very happy when I told him what he’s trying to do is fraud but he maintains it’s legal. I know there are certain circumstances you can do this, but believe there’s a two year rule?

caprikid1

No you are right, if you move in with the sole intention of avoiding CGT then it does not stack up.

Although once it goes beyond 6 months they are probably less likely to look at the transaction but I doubt that is going to happen.

p00hsticks

It won't work - or at least only partly.

CGT liability is calculated on the actual usage of the property over the whole period of ownership, worked out in months.
So the potential gain is worked out by taking the price he sells for - minus the price he paid - any buying and selling costs - any allowable improvement expenses. You then work out the proportion of time for which it was his main residence, plus an additional nine months allowance, and can exclude this proprtion of the gain.
. 
So even if he moved in now and got HMRC to accept it as being his main residence (and as you say, I believe that you technically need to do this within two years of any change in the properties you own) then at best that would give him an extra nine month period after he then moved out again.  He'd still be potentially liable for the proportion of time he rented it out. 

And given that the CGT allowance is dropping from £6k to £3k next year, and house prices are falling in many areas, he may find that delaying the sale by moving in ends up costing more than it gains. 

Tax when you sell property: Work out your gain - GOV.UK (www.gov.uk)

theoretica

CGT doesn't work like a yes/no but as a proportion.  Length of time owned and length of time as primary residence.  So if he moved into it as his primary residence, lived in it for another 4 years so owning it for a total of 8 years he would owe CGT on half the profit...

There is a few month leeway added to the time a property was primary residence - but less than 2 years.

_Penny_Dreadful

Aberdeenangarse said:

Fairly certain I know the answer to this, but need confirmation.

Cousins son has a second property (BTL) which he purchased four years ago. Mortgage came up for renewal and rental payments are now less than mortgage so has had to sell. He’s made a reasonable profit, excess of £100k, and reckons he can avoid paying CGT by moving into the BTL whilst it’s being sold, and nominating it as his primary residence. Once sold he will then move back to his original ‘home’ He wasn’t very happy when I told him what he’s trying to do is fraud but he maintains it’s legal. I know there are certain circumstances you can do this, but believe there’s a two year rule?

As others have said, that's not how CGT works.  Him moving in for a couple of months isn't going to negate all the time it was not his PPR.  The only PPR relief he might get is for the few months he lives there not the 4 preceding years. 

I suspect the two year rule you are thinking of is when you have more than one property that you reside in and can choose which one to nominate as your PPR since you can only have one PPR at a time.  It's something MP were, and possibly still are, notorious for doing because they have a property in their constituency and one in London, splitting their time between them.  Your first cousin once removed cannot write to HMRC claiming the rental property was his PPR when it wasn't his residence at all. 

km1500

and of course he will pay cgt on his main residence when / if he sells it (pro-rata for the period it was not his main residence)

silvercar

Provided he genuinely moves in, transfers his address registered with his work/ doctors etc and lives there for at least 6 months, he would probably get away with it. 

Of the gain he would be exempt for the 6 months + an extra 9 months of the 54 months he owned it, so that would be nearly 28% of the gain avoiding CGT just by making the move. That would save him as much as £7,840 assuming a 28% marginal CGT rate on 28% of £100k. If some of the gain is charged at 18% as a basic rate tax payer the benefit would be less. 

_Penny_Dreadful

silvercar said:

Provided he genuinely moves in, transfers his address registered with his work/ doctors etc and lives there for at least 6 months, he would probably get away with it. 

Of the gain he would be exempt for the 6 months + an extra 9 months of the 54 months he owned it, so that would be nearly 28% of the gain avoiding CGT just by making the move. That would save him as much as £7,840 assuming a 28% marginal CGT rate on 28% of £100k. If some of the gain is charged at 18% as a basic rate tax payer the benefit would be less. 

I think it's only the final 9 months of ownership not the time it was his PRR plus an additional 9 months.  In your example it would only amount for an extra 3 months providing he could convince HMRC it was genuinely his PPR for any length of time.  Well, not convince since it is self assessment but justify his claim it has been his PPR should they decide to open an enquiry on his return.

saajan_12

silvercar said:

Provided he genuinely moves in, transfers his address registered with his work/ doctors etc and lives there for at least 6 months, he would probably get away with it. 

Of the gain he would be exempt for the 6 months + an extra 9 months of the 54 months he owned it, so that would be nearly 28% of the gain avoiding CGT just by making the move. That would save him as much as £7,840 assuming a 28% marginal CGT rate on 28% of £100k. If some of the gain is charged at 18% as a basic rate tax payer the benefit would be less. 

The 6 months would be part of the 9 final months bonus, so overall its just 9 months PPR out of 54 months, ie 16.6%. That would be between 3k and 4.6k benefit depending on tax rate. Not insignificant, but potentially not worth double moving costs, double hassle of changing over addresses, risk of HMRC fine, potential delay to sale, etc. 

alanyau88

HMRC will have his self assessment records and if he doesn't want to pay a fine or prosecution, then it's best he tells them the truth.  Anything that is untrue or false is Fraud.