Landlords Exit Strategy – Readers CGT Question

Mark Alexander says:

Hi Chris

I will do my very best to answer this question but please note that I am not a qualified tax specialist. Thank you for the compliments by the way. To make contact with the tax advisers that I use please see >>> http://www.property118.com/index.php/landlord-tax/

If you sell your former homes within 3 years of having lived in them, my understanding is that no CGT will be payable.

Instead of selling them though, have you considered refinancing them? You could offset interest on new buy to let mortgages against the rental income as an expense – subject to the loans not exceeding the purchase prices. You may also be able to restructure the ownership in order to be even more tax advantageous going forwards too.

If selling is your chosen option, not that timing of sales is also a major factor if you want to maximise your CGT annual exemptions. For example, selling one property per tax year.

A very similar question came up on another thread and Neil Barlow, who is a senior tax adviser with the accountancy form I use, gave this response in respect of CGT on former residences.

“The basic Capital Gains Tax treatment on the disposal of a main residence is that any gain is
subject to Principal Private Residence Relief and therefore exempt from CGT providing the property has been the only or main residence throughout the entire period of ownership. This is subject to various provisions to cover situations such as periods of absence, owning two or more residences and garden or grounds which exceed half a hectare (approximately 1 acre).

“Providing a property has qualified as the only or main residence at some time during the ownership period, then the last three years of ownership always count as a period of residence.

“In addition a Residential Letting Relief is available in respect of a property which has been let but which has also been the only or main residence at some time during the ownership period. This relief is the lower of £40,000 and an amount equal to Principal Private Residence Relief due.

“These reliefs are time apportioned over the entire ownership period. For example, say a jointly owned property had been owned for 10 years and is sold making a gain of £100,000. The property had also been the only or main residence of the joint owners for the last 12 months of ownership. The capital gains tax computation would comprise the following:

Gain £100,000

Private Residence Relief (3 years out of 10) -£30,000

Residential Letting Relief (lower of £40,000 and Private Principal Residence Relief) -£30,000

Capital Gain after reliefs £40,000

Less 2 capital gains annual exemptions provided not already used -£21,200

Chargeable capital gain £18,800 (taxable at either 18% or 28%)

I hope this helps.

With kind regards,

Neil Barlow FCCA ATT

Mark Alexander says:

Hi Bill, I agree. Do you concur with Neil Barlow’s advice in respect of the basis of calculation? (see text embedded into my post below). Also, what do you think about my alternative suggestion of refinancing and re-structuring ownership instead of selling? Have you seen this strategy? >>> http://www.property118.com/index.php/landlords-tax-planning-strategy/31907/

Mark Alexander says:

Bill

I don’t understand your point, we are not discussing private residences here. We are discussing Buy-to-Let property investments.

You said “The refinancing point should not be a problem as long as the amounts raised do not exceed the original cost of the let properties plus capital improvements.” That’s why I requested your opinion on this linked article >>> http://www.property118.com/index.php/landlords-tax-planning-strategy/31907/

chris says:

does the fact that the propeties were all at one time or another our priciple homes affect the way CGT is calculated

Mark Alexander says:

Hi Chris, yes it does, hence my first response. Note that just above the comments section there is a label called “Discussion”. If you click the arrow to the right you have an option to sort comments to show each discussion thread in the order posted, i.e. Newest or Oldest. I hope that helps.

Puzzler says:

The type of mortgage is irrelevant as to CGT. CGT will be payable on all the let properties after your personal CGT allowance is deducted unless you can offset some principal residence relief, or you have made a loss on any of them, you need advice as to whether you can do that or not. Also the status of your main home which was bought with a business loan, is it a guest house or something? otherwise how did you manage to get a business loan to buy it? You cannot transfer the funds without accounting for CGT when each property is sold.

A propos Marks’ comment about refinancing, I think Chris wants to clear his debts, it may be an age thing but that is what I would also like to do, there comes a time when refinancing ad infinitum loses its appeal in spite of the advantages especially as the debts have to be paid on death, with substantial debt the options are limited. I used the life insurance calculator provided and would need cover almost to the total loan value for my beneficiaries to refinance loans which are currently extremely favourable. In which case it would be better if they were paid.

Chris says:

Ok thants for all the comments, refinancing is or benificiary conciderations are not on the cards, the advise on reducing the CGT has been taken onboard and is being followed up. The aim is to cash in and retire.
Rgds Chris.