Exit plan – move in before selling up to avoid CGT

by Mark Alexander

10:41 AM, 28th August 2012
About 7 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

Mary Latham

13:59 PM, 2nd September 2012
About 7 years ago

I do not own a "prime residence" all my properties are potential rentals. I moved into most of my properties when I bought them and lived there as my only and prime residence until they were ready to let or for at least a few months whichever was the longest. I didn't want to get to my later years and have to move every few years so I got it out of the way and kept records early on. I realise that it is to late for some people to do this now but it is worth thinking about if you are younger and still buying.
The property that I live in is owned by my limited company - having transfered it after taking the tax relief - I pay tax on the benefit in kind but no rent and all my repairs are tax deductable through the company because the property is a rental. The company does not pay tax on the rent because I don't pay rent.

22:29 PM, 26th May 2013
About 6 years ago

We have a holiday home bought many years ago we now want to move into this property after selling our home of 35 years, if we later want to down size further would we be liable to cgt?

Mark Alexander

7:31 AM, 27th May 2013
About 6 years ago

@Pete, yes you will need to declare your gains but a good accountant should be able to help you minimise the tax. See Neil Barlows post above

Puzzler

9:14 AM, 18th June 2013
About 6 years ago

If you wish to change your PPR you have to notify HMRC within 2 years of a PURCHASE. Continually downsizing may not work, if HMRC finds out you had a lettings business. What is now being called aggressive tax avoidance.

21:42 PM, 1st July 2013
About 6 years ago

Thanks for the excellent article. I still have questions though as I am in a fairly unusual situation it seems. My brother and I bought a house together, neither of us own any other property. We spent ~3 months refurbishing the property, no council tax was paid as it was unoccupied. After the refurbishments the property was let for ~3 years and the council tax was paid by the tenants. So now someone has asked if we would sell the house and we stand to make a capital gain of ~£60k. Do we qualify for any relief as it is? Or how long will we have to live in the property now to qualify for relief? We’ve both been renting elsewhere for the last 3 years. I understand the rules are to tax gains made through selling second homes, but the rules are currently looking likely to penalise us. Many thanks in advance

Mark Alexander

21:56 PM, 1st July 2013
About 6 years ago

Hi Will

It seems you have made a £30,000 gain each. You each have an annual CGT exeption of £10,900 each so you will pay CGT of the balance of £19,200 at a rate of either 18% or 28%.

Are you and your brother married?

If you are then you could add your wives onto the deeds on the day of completion and use their £10,900 of CGT annual exemptions too.

Please take professional advice from a qualified accountant and solicitor before you do this. Note that some accountants and solicitors are unaware of this strategy to reduce CGT so if you get stuck let me know and I will be pleased to introduce you to the right people.

Liz Saunders

15:32 PM, 17th July 2013
About 6 years ago

With the investigative side of HMRC does anyone know exactly how they can prove intentions? I have been gifted a property, which I have converted, the property was for me and my partner, (unmarried) who has just this week got a job on the other side of the country. Whilst doing the conversion for a year we haven't exactly loved the area its in, and really I'm thinking of not staying here alone. Its the only property I have ever owned, and I will live here for 6 months at least, but will move if his job becomes permanent; would I qualify for ppr relief, or would it just be easier to pay the CGT on the 200k gain? I have never developed a property previously, though I'm concerned this appears like a development. Can anyone suggest anything?

Nadette Verter

7:44 AM, 25th July 2013
About 6 years ago

Good morning,
We are planning to buy our buy to let flat. We bought it in 2002 for 120,00 pouns and are planning to sell for 240,000 pounds in 2014. Do we have to pay CGT? Thank you.

Mark Alexander

8:32 AM, 25th July 2013
About 6 years ago

Hi Nadette

When you say you are planning to buy, did you mean to say that you are planning to sell?

If so, you have made a £120,000 Capital Gain which will be taxable if you are selling the property to anybody other than a spouse or Civil Partner.

The rate of tax payable is likely to be 28% based on this level of gain. There are personal annual CGT allowances which can be utilised to reduce the tax burden and there may be other opportunities available to you to reduce the tax such as adding spouses to the deeds immediately prior to completion. I recommend you to take professional tax advice in this matter. If you visit the link below and complete your details on the form I will refer you to the tax advisers who do all of the tax planning for me. It's not a free service but you can be certain that their advice will be 100% accurate as they are qualified accountants and their advice is insured. They will also be able to advise you the best ways to reduce your tax burden. The link is >>> http://www.property118.com/landlord-tax/

Nadette Verter

8:40 AM, 25th July 2013
About 6 years ago

Reply to the comment left by "Mark Alexander" at "25/07/2013 - 08:32":

Thank you very much for your prompt reply. Are we allowed to deduct the allowance for each year since 2003 because in that case we would not have to pay CGT (the allowance for my husband and myself would be well over 100,000 pounds). Thank you

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