Viable strategy for legally avoiding 3% stamp duty and CGT?

by Readers Question

11:38 AM, 7th February 2016
About 3 years ago

Viable strategy for legally avoiding 3% stamp duty and CGT?

Make Text Bigger
Viable strategy for legally avoiding 3% stamp duty and CGT?

Viable strategy for legally avoiding 3% stamp duty and CGTDear all,

Firstly may I just say how helpful i’ve found this site and all the contributions from it’s members. It’s a hugely useful resource for a fairly inexperienced landlord like myself, and I’m very grateful for it’s existence!

I currently have BTL mortgages on 2 flats and a residential mortgage on my own home, all in the London area. I have no plans at present to expand my portfolio until I have a better idea of the impact of new legislation on the property market. I would however like to improve my cash flow and liquidity so that I’m in the strongest position possible.

My idea is to move out of my current home and into my lowest value, lowest yield BTL property, and then let my current home (assuming I can obtain permission from both TMW and Santander to do this).

Whilst living in my BTL i’d like to make improvements and add value to it, and then In 8 months time when my mortgage deals come to an end (roughly all at the same time) I’d like to sell the BTL as my primary residence, remortgage my resi onto a BTL to release equity, and then buy another property with the cash which I will then live in. I should also then be fortunate enough to have 100k or so left over for contingency.

I’ve calculated that this will improve my cash flow considerably as my current home has a higher rental value than the BTL, providing good income even once remortgaged at 75% LTV.

I’d be grateful if you’re able to advise on the following:

Will CGT be exempt on the BTL if i’ve lived there for 8 months? (I will have only owned it for 18 months as I ported the mortgage form a previous property).

Will the new cash purchase be exempt from the 3% second home stamp duty, as I will be replacing my existing PPR?

Does anyone know where The Mortgage Works stand on living in BTLs whilst making improvements?

My current home was bought 10 years ago for 170k and i now hope to borrow 300k. Will interest payments be tax deductible on the full 300k borrowed?

Apologies if this all sounds a bit extreme, but I feel this could set me up for the future and so i don’t mind a bit of upheaval while i’m still young(ish) free(ish) and single(ish). I also bought the BTL on the basis that I may one day live there. As a rule I never buy properties that I wouldn’t live in myself!

I’d be very grateful for any feedback on the above, or any advice if I’ve missed something here.

Many thanks,

Ben



Comments

Mark Alexander

11:45 AM, 7th February 2016
About 3 years ago

Hi Ben

I would describe the scenario that you have outlined as being unusual and very personal to your somewhat unique circumstances as opposed to being a tax avoidance strategy.

However, from what you have said, I have concluded that the tax position you have outlined is as you suspect, i.e. good news for you!

As you have rightly identified, your plans will be highly dependent upon how your mortgage lenders respond to the consent that you will be seeking.

If/when you do move into your BTL make sure that you can prove absolutely that you are living there. For example, get your bank and credit card statements registered for delivery there, redirect all of your other mail there, change your driving licence to that address, make sure Council Tax, mobile phone bills and all other utilities are registered at that address. That way, if HMRC do open an enquiry you will be well positioned to cooperate fully.
.

Simon Lever

17:54 PM, 7th February 2016
About 3 years ago

Hi Ben

As Mark says you seem to have hit on a good strategy.

If you move into the lowest value BTL then you should pay no GCT. The last 18 months of ownership for a principal private residence (PPR) is always CGT free. Therefore if you have owned it less than 18 months when you sell it then there will be no CGT on the sale.

For the property to be a PPR is a matter of fact. As Marks says you have to make it clear that it is your PPR and not a sham.

For the improvements you make you will get no benefit as there will be no CGT and therefore you have to make sure the increase in value of the property is in excess of the cost of improvements.

For your current main residence you will still receive some CGT relief for the number of years you have lived there compared to the total period of ownership. Additionally the last 18 months again will be CGT free.

Additionally as you will be renting out the property you will also be able to claim lettings relief of up to £40,000 in addition to the CGT reduction. If the property is jointly owned by you and a spouse/partner they can also claim the lettings relief.

Lettings relief may also be availble on the new PPR you move into if you sell it having owned it for a period of more than 18 months.

With regard to the 3% SDLT surcharge you are right that this will not be payable as you are replacing one PPR with another. However if the new property is purchased before the old one is sold then you will have to pay the 3% and then claim it back when you move into the new PPR and sell the old one. Be careful of the timing. This is as I understand the current proposed legislation but until it is published and passed through parliament things can still change.

In my opinion the interest on the new mortgage will all be allowable against the rental income as long as the market value of the property is in excess of the mortgage taken.

I can make no comment on The Mortgage Works as I know nothing about them. Look at the mortgage documents you have to see if there is anything in them that could help.

Make sure you discuss everything with your accountant before proceeding.

Ben Reynolds

14:13 PM, 9th February 2016
About 3 years ago

Hi, many thanks for your comments.

Mark - yes I agree, this scenario perhaps falls more under tax planning than tax avoidance.

Simon - thank you for the breakdown. You've highlighted some important points which I may have otherwise overlooked.

Cheers!

Ben

Deborah Manship

17:23 PM, 30th April 2016
About 3 years ago

I have a slightly simpler question that I'd be grateful for your opinion on. We have a residential mortgage and a buy to let property which we have owned for just over a year. We think we'll sell our residential property in about two years and move into our buy to let until we find another property to buy that we'd like to live in. Then we'd sell the buy to let.
The question is, can we avoid CGT by living in the BTL? And how long do we need to live in the BTL to do that.
Any advice appreciated. Thanks.

Neil Patterson

17:38 PM, 30th April 2016
About 3 years ago

Hi Deborah,

Please see our tax page on the subject >> http://www.property118.com/capital-gains-tax-relief-on-a-property-you-have-lived-in/

And the Tax tab 🙂


Leave Comments

Please Log-In OR Become a member to reply to comments or subscribe to new comment notifications.

Forgotten your password?

OR

BECOME A MEMBER

Change to Universal Credit rent arrears payments

The Landlords Union

Become a Member, it's FREE

Our mission is to facilitate the sharing of best practice amongst UK landlords, tenants and letting agents

Learn More