Exit plan – move in before selling up to avoid CGT

by Mark Alexander

10:41 AM, 28th August 2012
About 6 years ago

Exit plan – move in before selling up to avoid CGT

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Exit plan – move in before selling up to avoid CGT

This weekend I received an email from Cissie asking “If I move into a buy to let property which has been let for several years, and sell it after 6 months or a year, can I avoid CGT ? “

It’s a very interesting question, one which is close to my own heart as my parents investigated that strategy before jumping in head first. There isn’t a black and white Yes or No answer to this one, as my accountant often says to me “it depends”

My parents are in their 60’s and built up a small portfolio in the late 1990’s. They have been cashing in on their gains since about 2005 to fund their retirement, continually downsizing by moving into properties which they previously rented. Tax is obviously a consideration for them, they knew gains made on the sale of their own home were not subject to capital gains tax and wondered how this would affect them if they moved into properties they had previously let.

Most of the properties they purchased are nice family homes so the rental yields are not that great. They were only really interested in capital growth and as history has proven, they have been very fortunate in this regard. They have continued to downsize every two years or so. Their strategy has been to move into the properties which provide the lowest income, typically the larger properties so this has siuted the downsizing strategy very nicely.

The key to this the CGT position is being able to prove absolutely that you have moved in and the former buy to let property is now unquestionably your principal private residence (i.e. your first home). Expect to have to produce the following evidence if you are investigated by HMRC:-

  • bank statements at the new address
  • registration with local doctors and dentists at the new address
  • credit cards registered at the new address
  • registered to vote at the new address
  • council tax bills in your name)s) at the new address.

My advice to any landlord or property investor is to employ the services of a professional accountant, my parents use the same one as me. A good accountant will save you far more than they charge, not just in tax but in helping you not to make daft mistakes. Regardless of how many times HMRC tell us that “tax doesn’t have to be taxing” – IT IS! I’d go as far as to say it’s an absolute minefield when it comes to property investment and trading and unless tax is your full time occupation. The chances of most landlords actually being able to complete a tax return properly, claim all expenses and capital items and actually plan to pay the minimal amount of tax is VERY slim without professional assistance.

If you would like to ask a question or share your opinions please use the comments section below or email me – mark@property118.com

We now have a complete section dedicated to articles, Q&A’s and discussions regarding exit strategies. For details please 

Exit Strategies for BuyToLet Landlords




Comments

Tony Atkins

17:55 PM, 28th August 2012
About 6 years ago

I agree with Mark this area is a minefield and as I know from personal experience, HMRC are now really attacking people who move from house to house in order to establish a PPR and avoid CGT. I am currently being investigated by HMRC for a property I renovated and moved into for six months before selling in 2006; the HMRC officer is saying that although I clearly moved into the property, had nowhere else to live, had all my furniture and bills there, etc as Mark advises, this is still not enough: he simply does not believe I intended to live there "permanently", so is trying to charge me CGT.
In other words, it is perfectly possible in his view to be living in a house and for it *not* to be one's principal private residence, because he believes I lacked sufficient intention to remain there.
I would advise any landlord to insure themselves against a tax investigation as it is extremely expensive to employ an accountant for such cases: the requests for more information from HMRC just go on and on - they are utterly relentless and feel licensed to state what your intentions were in moving into a property (naturally in their favour), irrespective of how much factual evidence of occupation you provide.

Neil Barlow

18:05 PM, 28th August 2012
About 6 years ago

Hi Mark,

Bronya is on holiday this week so I thought I would respond in her absence.

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%)

To qualify for Principal Private Residence Relief the property must be occupied as the only or
main residence and it may be necessary to prove this to H M Revenue and Customs. HMRC do not give any guidance but ensuring you are on the electoral role, registering for council tax and registering with the local doctors surgery will all help your case.

If two or more properties are available to use as the main residence, an HMRC election may be
necessary and there are strict time limits in which this must be done.

I hope this helps.

With kind regards,

Neil Barlow FCCA ATT

Mark Alexander

23:23 PM, 28th August 2012
About 6 years ago

Thanks for your excellent response Neil which I have posted for you.

NOTE FOR READERS - Neil and Bronya are my accountants. Based on the profits my parents have made, Neil's explanation now explains perfectly to me why they have paid no tax on their disposals. If they had purchased properties which had made a lot more money though I can see that they would have paid tax.

Therefore, I'm pleased to say that I gave the correct answer to Cissie, which was if course, "it depends"

cissie Zheng

7:09 AM, 29th August 2012
About 6 years ago

Thanks to mark, Neil and Tony. All your comments are very helpful! Really appreciated!

Cissie

12:25 PM, 29th August 2012
About 6 years ago

Perhaps everytime you move in to a PPR you should send copies of all id etc showing your address details.
How do you prove intent to remain in a property?
How do HMRC prove that you did not intend to remain in the property?
There is no period that a PPR has to be lived in or that is stated to be your PPR before you may sell it.
Do HMRC have a crystal ball to help LL ascertain how long they will remain at their stated PPR before they sell up, so that they can then inform HMRC!!

14:32 PM, 29th August 2012
About 6 years ago

My wife inherited her father's house. She now lets it out.
She lived there as a child. Does she qualify for relief on that basis?

Neil Barlow FCCA ATT

16:33 PM, 29th August 2012
About 6 years ago

Hi Mike,
Unfortunately,
PPR Relief is only available for a period you own a property. Your wife will not be able to claim the relief unless she has occupied the
property as her only or main residence since she inherited it.

Recardo Knights

16:28 PM, 30th August 2012
About 6 years ago

Hi Talk about confusing, I lived in a large 4 bed semi for 15 years. I lent the kids some wings and thet flew the nest. We (the wife) decided to down size and turn the property into a BTL with another mortgage. According to the Accountant (although I have not realy gone into it) if I lived there for 15 years then as a buy to let for 5 years, I have owned the property for 20 years. If i sell I then have to pay 5/20ths of the profit from the sale.
If my maths are right lets say I brought for 100,000 sold for 400,000 profit ( worth that 3 yrs ago) =300k
300k divide by 20 = 15k per year X 5 years (rental time) = £75k
If capital gains =20% 75k x 20% = £15000 due for tax
My property is in joint names and we are allowed £10k each allowance on CGT so no tax to pay.
If we then move back in for 3 years, total time owning the property is then 23yrs sell for 300k profit divide by 23 X 5 (years rented) = 65K. still no tax to pay.
Please take advice on this as it was the right thing for me to do at the time and I felt there would be no CGT to pay. I'm paying the tax on the rental profit and paying for the upkeep.

Neil Barlow FCCA ATT

17:35 PM, 30th August 2012
About 6 years ago

Hi Recardo,
As mentioned in my comment below, providing a property has qualified as your 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. Therefore the starting point in your example is that 18/20ths of the gain will qualify for PPR relief. The balance of 2/20ths amounts to £30,000 and this is covered by the letting relief and there is no CGT.
If you move back into the property for 3 years prior to the sale and it qualifies again as your only or main residence then your calculation of the chargeable gain of 5/23rds is correct. The balance of approximately £65,000 would normally be reduced by the £40,000 letting relief to £15,000. However as you own the property in joint names with your wife then you are both able to claim the letting relief and the entire remaining gain of £65,000 is reduced to £nil.

It is worth noting that the CGT allowance, currently £10,600 is deducted from the gain after the deduction of other reliefs and it is not deducted from the capital gains tax liability (which you appear to be doing in the first part of your example).

Mark Alexander

18:38 PM, 30th August 2012
About 6 years ago

Thanks for commenting again Neil, it must be paying off for you as two readers of this article have already emailed me their contact details asking me to put them in touch with you for tax advice.

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