buying and selling houses, renting them and paying tax

Jimster_s_2

posted a similar question in another section but this is slightly different

my current situation is that i own a house. i have a normal residential mortgage on it. i am going to be buying another property to do up and sell for a profit.

if i have 2 houses then ill have to pay tax on the one i sell as far as i know. if i transfer the one i already own into a buy to let and rent it out then i can buy this new one, live in it while im doing it up and when i sell it i wont have to pay tax because its my main residence.

think im right so far..........

then when i sell the new ones (if i dont decide to live in it) i will be left with one buy to let mortgage with a tennant in it. if the tennant then leaves can i bring this back into a normal residential mortgage again and sell it if i wish (or live in it again)? if i did this would i be tax free on the profits on the houses?

or is there a better way of doing it?

NeilW

This is a common manoeuvre. If you execute the strategy within three years then it is entirely likely that the profits on both houses would remain free from capital gains tax. What you need to do is make sure that you tell the tax office that the house you are doing up is your Principle Private Residence once you move in.

NeilW

Jimster_s_2

thanks. if i tell them that the new house is my new principle private residence then do i actually need to change the other one into a buy to let or can i leave it as it is, then when i sell the new one let the tax office that my old one is my new principle private residence

MarkyMarkD

You're confusing a few things here.

1. What you do about the mortgage

You can try to keep a residential mortgage on your first property, but get consent to let from the lender. If you tell them (truthfully) that it's a temporary arrangement whilst you do up your new property, they may be more inclined to let you do this.

Or you can get a "buy to let" mortgage on the original property, and let it out.

Either way, you are going to need a new residential mortgage on the second property - unless you are buying it with spare equity from the first property. The second lender may not be happy with you having the other loan outstanding, but they MAY be understanding if they know that you've let it out.

2. The tax situation

Your principle private residence is exempt from CGT; as Neil said if you sell up within three years of it ceasing to be your principle private residence, it will still be exempt from CGT.

So if you keep property A for 2 years after moving out, and let it, you can still sell it without incurring CGT. Even if you go over the three years, it's only the extra months which count and the gain over the whole time you've owned it is pro-rata'd to calculate the proportion of the gain which is subject to CGT.

If you elect immediately on buying property B for that to be your principle private residence from that point on, you won't have to pay any CGT on gains on that property either.

Jimster_s_2

wow thats great i didnt know that. looks like my situation is less complicates. can i jsut confirm a few things

option 1.
keep my current house as it is (only owned it 6 months) with the current mortgage. get this new residential mortgage (already in progress). dont rent the first one out at all, just have 2 mortgages. i will sell this new property in 6 months or the latest 12 months. if i have 2 mortgages can i sell either without paying capital gains tax as long as its done within 3 years of buying them? if i can do this then its perfect and ive got nothing to worry about. as long as my new mortgage company dont mind me having 2 mortgages then thats great. would i have to bother telling the inland revenue about changing residence back and forth? if i can sell either in 3 years and not pay tax i dont see the point in telling them.


option 2:
keep my first property as is with the mortgage but temp rent it out. get the new residential mortgage and renovate the house then sell it. the new one will be tax free and then once ive sold it the old one will still be if its my main residence again or if its not then its still tax free if sold within 3 years. do i have to tell the inland revenue about switching residence? if the new one will be tax free anyway whats the point in telling them?

option 3:
change property A into buy to let. buy new peroperty B. sell property b then i could keep property A as is or change back into residential.


can you please comment on the above situaltions regarding capital gains tax and also letting the inland revenue know about switching residence.


can you own as many houses as you like and sell them within 3 years and not pay capital gains tax? if i have my own house i live in, can i keep buying new houses to develop and sell them within a year and not pay cgt at all on any of the new ones.

Elaine_Wilson

Jimster_s wrote:

.can you own as many houses as you like and sell them within 3 years and not pay capital gains tax? if i have my own house i live in, can i keep buying new houses to develop and sell them within a year and not pay cgt at all on any of the new ones.

Basically you can but you must remember two important things.

First. This three year exemption only applies to houses which have been your residence. This is classed as a matter of fact, ie you cannot just say the house is your residence. You therefore need to accumulate as much evidence of your residence as possible. Obvious things would be ensuring you are on the electoral roll at that address, using it for all post, especially bank and credit card statements. Although you do not have to tell the Inland Revenue, not to do so may imply that you do not treat it as your residence. So, be safe and write to them.

Second. You would need to be careful how you went about this. If you buy a property with the express intention of renovating it and selling for a profit the it becomes an "adventure in the nature of trade". This would make it subject to income tax and the capital gains tax exemptions would no longer be available. This would not be easy for the Revenue to prove on the first transaction but if it became a regular thing it could make it much easier for them

MarkyMarkD

Good advice, Elaine. There's certainly no harm in being open with the Inland Revenue in the circumstances described. IIRC, the Inland Revenue assume that each time you buy a property that becomes your principal private residence, unless you notify them otherwise.

roger56

To make another house your main residence you can give Notice under Section 222 5(A) TCGA 1992 to the Inland Revenue.
Basically you can make another house your main residence for a period then revert back to your other property. However, you have to be able to show you lived in the house as your main property ie show utility bills in your name etc. Your Inland Revenue correspondence will also start to arrive at the main residence. Do keep receipts and other info. That way CGT can be minimised. An example of this situation would be working away from home for a period and buying rather than renting accomodation.

ltlmiles5

I don't mean to hijack this topic, but on the same subject....

My mother-in-law has a house that she's been trying to sell for a while with no luck. She's not lived there, but has rented it out previously, though it's currently empty.

She's been asking us if we want to buy it off her basically for what she paid for it a few years' back. I understand that would be at least 30-40 K less than what it's worth now.

1) Would we be able to buy it without getting into trouble with the relevant authorities, since it's within the family?
2) I was advised by a friend that if we bought it and wanted to sell it later, we would have to live there for quite a while, so as not to incur CGT. Are we talking about a matter of months, or more?

Thanks in advance for your time and replies.

neiledmundson

I concur that the evidence of residence (with Bills etc) makes sense but i have bought an additional property which is in joint names with my wife. We wish to elect for the new property to be my priniciple residence adn the old house hers, Anyone experienced this?

Mrs_pbradley936

Yes you are not allowed to do that. If you are married you have to share the PPR. One advantage you do have is that you can use your wife's allowance as well as your own so you could have £17,600 as a gain before tax.