Selling a let property and capital gains

[kartstar_uk]

Hi,

I have been renting out my house for the last year through an agent, while living with my partner. I now want to sell the property but am mindful of capital gains tax. My name is only on the mortgage of the rented property, so I am thinking that I can class this as my 'main residence'. I am about to fill out my tax return for the rent income but am worried that this would suggest to the IR that it is not my main residence.

Can anyone claify my situation in terms of whether I would be liable for CGT, or does this only apply after 3 years of renting the property?

Advise greatfully received.

Sorry if this seems a numbty question- but I'm new to all this!

[Melboy]

You will need to consult an Accountant who specialises in Property Taxation BUT I can tell you that the IR will need to know your circumstances because you are not selling your principle domacile residence. There are a lot of tax advantages you could qualify for.

They (IR) view each case as presented to them. You will have an allowance made for your circumstances because you have lived in the selling property prior to renting the property out.

You should have also declared/informed the IR your rental income immediately the property was rented out and not 1 year later.

If you sell a property now, the Solicitor has to inform the IR of all your details so your chances of "getting away with non-declaration" are fairly slim these days.

[Whitey]

Hello

From my basic understanding of CGT I would say if you have only been renting out for 1 year I don't think you will be liable.

You are tax exempt for the whole period that you were living in your property and also tax exempt for the last 3 years of ownership when selling the property even if you have been renting it out.

The Inland Revenue website is really informative, especially the help guide reference IR283 in relation to CGT. As this is only my understanidng you SHOULD clarify it by phoning one of the help numbers listed on their site.

Hope this helps

AW

[Frogman]

Hi,

I have an interest in this topic too for similair reasons as Whitey. I'm confused about this 3 year rule too. I've read the information at the IR site and I'm still none the wiser! Can anyone clarify how it works?

Thanks

[kartstar_uk]

Thanks for all your replies, I shall seek advice from an accountant on this matter for my own individual case.

[Taxation Solutions]

Basically to determine the capital gain on disposal of a property, you have to look at the whole picture e.g. period occupied as main home (PPR), period let to tenants and period empty etc etc.

The gross gain is then reduced by PPR exemption, last 36 months rule, lettings relief, enhancement expenditure amongst others.

The period the property is actually let is irrelavant to some extent, as you could rent a property for say six years and CGT would not be payable. It depends entirely on the whole picture.

I hope this helps

www.propertytaxation.co.uk

[Frogman]

Taxation Solutions said:

"The gross gain is then reduced by PPR exemption, last 36 months rule, lettings relief, enhancement expenditure amongst others."

Ok......so the last 36 months rule is what exactly?

[plym77]

Hello! I am new to this site, I have a rental property, but am also a chartered tax adviser.

I am happy to help 'caveated' should you still have queries on this subject.

With regard to the last 36 months:

In order to obtain this exemption, the property must have been your principal private residence at some point in ownership. If the property was previously your home, this should not be a problem, however, if the property was baought as a sole investment property then it may be that PPR cannot be claimed. In some circumstances you can claim PPR, but there is too much info - I would be tapping away for ages! There is also an additional relief, known as lettings relief that can be available if a property has previously been you PPR and subsequently is let out.

If you provide me with your circumstances, I will help if I can - obviously any advice I give is off the record, and (for my own neck) I should point out that you should seek the advice of your own accountant before making any final decisions

I hope this info is helpful - I have my own query to post regarding deposit retention - so would be grateful if someone could help me with that - I will post elsewhere

[Frogman]

Hello Plym77.....and welcome, though I'm relatively new here too!

Thanks for your input and generous offer of free advice .

Basically, I'm trying to find any legal dodges to avoid paying CGT, . ( Aren't we all!)

I currently own 2 properties (one of which is my PPR), I'm close to buying a third and possibly a fourth later this year.

How long do you have to reside in a property for it to become your PPR?

I read somewhere that you can move from one to another in a complicated chess like game, spending some months in each one and threby avoiding CGT. I don't think this is something I'd like to do personally, but I'm still interested to know the rules that apply.

Also, any other info that you have that may maximise the CG tax relief would be most welcome.

Thanks Again

[plym77]

Hi Frogman

Basically is works like this. You are able to 'temporarily' elect another property as your Principal Private Residence (PPR) within 2 years of the purchase of another property. You can temporiliy elect for say a month, and then elect back. This will entitle you to the last 36 months of ownership to be deemed PPR. You can also then possibly claim 'lettings relief on account of the second property being owner-occupied but then let.

You must be very careful - in order to get the PPR exemption on the 2nd property the property must be livable - so furnished with essentials - bed, chairs, cooker etc. And must not be let at the time! Afterall, how can it be your PPR with tenants in it.

The exemption is aimed more at people who have a second home, but can be manipulated. And it is important to remember that the elections are only triggered on the purchase of new properties

I have (hopefully) attached two examples - one which shows how PPR exemptions can be manipulated, and one which shoes the addional lettings relief that can be available - if you are married, there are further opportunities available.

In your case, property 2 - if this is already let, not much can be done. But on purchase of property 3, consider a PPR election for a month, then elect back to property 1 (your home), property 1 will lose 1 months PPR exemption, but in the grand scheme of thinks this isnt usually material. Property 3 will now have 1 month at the beginning, and the last 3 years of ownership. After the 1 month, if you then choose to let property 3, that is your choice, you have gained the PPR exemptions (be careful of 'intentions' of property 3 - whilst I cannot see anything in particular, you should I think be able to 'prove your 2nd residence intention). Because the property has PPR exemptions, property 3 can now also be entitled to lettings relief (assuming it has been let of course!) - see the exemple - you should not that the letting relief is availabl to each owner per property - therefore in your case, if property 3 is owned with your wife, two lettings reliefs are available.

You could also apply the same thing to property 4, however, be careful not to take the piss - the IR may argue there was no intention for PPR - like I say, cant see anything specific, but I would be dubioud to be doing this lots of times over a short time span on a long term basis.

With regard to other CG reliefs - to be honest, PPR and Lettings relief are your best. On sale you will be entitled to taper relief if held for 3 years or more (called non business asset taper relief) - you could also consider bringing in the wife before exchange, and children (18 or over) as well if you knew were going to sell in advance - to do this ytou would need to make a transfer to the child in a tax year prior to the one you intend to see in - and there are non tax issues to consider here.

Incidentally, there are much better reliefs if your property is a furnished holiday let - however to be that there are specific measures to adhere to - of which one is that the property must not be occupied by the same person by more than 31 days - usually the failer!!

Hopefully some food for thought there - sorry it is long winded but I am an accountant afterall!

It appears I cant attach so have copied the lettings example, but you may need to line up. The PPR one involves time lines - if you know how I can attach - please tell me.

Plym77

Example of sale of a property which has been owner-occupied and subsequently let

Miss A purchased a property in August 1998 for £85,000. She lived in the property for the first 4 years, then let it out until sale in September 2008. The sale proceeds were £300,000.

£

Proceeds 300,000

Less Cost (85,000)

Gain 215,000

Less: Exemption for owner-occupation:

First 4 years

Last 3 years £215,000 x 7/10 (150,500)

64,500

Less: Lettings Relief

Lower of: a) PPR Relief (£150,500)

gain in let period (£64,500) (40,000)

c) £40,000

Gain left in charge 24,500

Less: Non Business Asset Taper Relief = 40% (9,800)

14,700

Less: CGT Annual Exemption (8,800)

Net Taxable Gain 5,900

Tax due (assuming higher rate) = 2,360

[Frogman]

Hi Plym,

First of all, thanks for taking the time out to give such a detailed reply, it really is much appreciated.

This CGT really is a complicated issue, it seems the more I find out, the less I know!

Some more q's:

Is there a minimum period of occupation as a PPR to qualify for the relief. Your example says a month, do you know if this is the minimum?

Who & when do you notify of your change of PPR?

What proof of intention is required when you elect a PPR?

How is it verified?

Could I elect for the minimum period as soon as the property is purchased and then let it for say 3yrs and then re-elect it for another month or so which would effectively roll over the 3yrs exemption? Or is this what you meant by not taking the piss?

BIG thanks again

[plym77]

Hi Frogman

CGT is indeed a complicated issue, but hopefully this will help:

http://www.hmrc.gov.uk/leaflets/cgtfs1.htm

Anyway, in answer to your questions:

There is no minimum period, I have known an election to be made for just a week. I always recommend a month.

You make the election by notifying your tax office by letter, something along the lines of:

....................

Dear Sir

PRINCIPAL PRIVATE RESIDENCE ELECTION

We elect that the following residence is our PPR with effect from 31 March 2005 under section 222 (6) (a) TGCA 1992.

**** Insert Address Here

Please acknowledge acceptance accordingly.

......................

Make sure you put your self assessment tax reference on the letter, or at the very least, your NI number.

Proof of intention and verification.... hehe... well this is a tricky one. When you send the letter you do not need to send proof, neither do the tax office send an officer around to check, however, proof would be that Council Tax is paid for the period, that all services are switched on, photos maybe (not essential). At the end of the day, there is nothing definate or agreed with regard to proof - you need to prove that the property was liveable so no appliances, service etc etc will mean it is not liveable. And remeber not to put a tenant in there while the property is your second residence!

Re your last question, you can elect for the first month, yes - this would give you the first month and the last 36 of ownership as PPR. You cannot however re-elect for another month in 3 years. The PPR deeming (last 36) only applies once, you cannot tot up endless periods of 'the last 36 months.

Beside which, elections must be made within 2 years of purchasing a property, therefore, in order to re-elect property 2 after 3 years, you would need to purchase a new property (3) - on which you would probably prefer to have the new election anyway. A second election of 1 month on property 2 would only actually give you an additional 1 month, not another 37 so the exercise would be pointless.

As said previously, the PPR election is meant more for second homes so it may be that you would need to argue your intentions to use as a second home if you were ever enquired into.

Another issue I had just thought of, not sure if it is a problem (as most of my clients pay in cash... how lucky of them!!), but when taking a mortgage, if the property is purchased under 'Buy To Let' you may well have an intention issue.

A lot of people make this claim for PPR, I would just tread carefully to ensure that everything that can be in place is in place. Make the claim if you think you can, and then should the IR ever enquire, you may just need to argue your case - the PPR election is there to be used - but the tax office may argue that you have not used it in the nature in which it was intended.

I hope this helps

Plym

[Frogman]

Hi Plym,

That's a great help, really, thanks a lot.

I think I now have a reasonable idea of where I'm going with this but there is one thing you made reference to in your last post that has thrown me a bit. You say "And remeber not to put a tenant in there while the property is your second residence!"

I was planning to elect it as PPR for a month and then let it out.

[plym77]

Hi Frogman

You cannot let it out WHILE it is you PPR. If you are going to take this route you need to elect as PPR, and then elect back after a month. Then after you have elected back you can rent the property out. the two things cannot cross. The whole point of PPR relief is that you get an exemption for a property being your main residence. You can therefore not elect as PPR while you have a tenant there since it cannot be your main residence if someone else lives in it

I think for the sake of losing one or two months rent, the gain of 3 years PPR exemption, plus a possible further £40k relief for lettings relief on any eventual sale is probably worth the loss of income.

Hope that helps

If you have any other questions, please do ask

Plym

[Frogman]

OK, understood, and thanks for your patience!

At the risk of being a real pain in the arse could you just clarify this last point:

If I elect a PPR for say one month and then elect back and let the property out for say 5yrs does the 3yr exemption still apply? What i'm trying to figure out is how long the 3yr exemption period is valid for, if that makes sense?

For example if I purchase property X in 2006 elect it as a PPR for a month and elect back to another property and then let out property X until selling it in 2011. Does the 3yr exemption apply to yrs 2009 thru 2011?

If so, then the one month election of a PPR would effectively entitle you to the 'last 3yrs' exemption, regardless of how long you own the property for?

Sorry to be so slow here .

[plym77]

Hi Frogman

It is no problem, honestly, I would prefer that you understood what you are doing.

In your example, the ACTUAL PPR is one month - this bit you cannot have a tenant. The DEEMED PPR is last 36 months - you can let it in this period. It is only the first month that you cannot have tenants as it is your 'elected main residence'. The last 36 months is deemed only by virtue of having the first month, and so can be let.

In your example you would get PPR relief on 1st month and last 36. There 37/60th would be exempt - 60 being the total months of ownership.

Then on top you may get a further up to £40k lettings relief exemption.

Assuming the first month is agreed to be allowable, the last 36 months exemption is there whether you own for 3, 5, or 50 years.

Hope that makes sense, if not shout!

Plym77

[Frogman]

Plym,

You're an asset to this site.

It's making more sense with every post, thanks.

I need to go away and digest all this for a while and maybe come back with some more Q's!

Thanks Again

Paul

[plym77]

Thanks for the nice words - it is nice to know that it has been of use to you.

if you have any other questions or posts re tax or accounts then just ask - but to make things easier for me it would be useful that you put something in the title of the thread that shows it is a tax/accounts related issue (like capital gains tax for example) this way, I will be able to easily home in on the stuff I can help with - section 21 notices and stuff mean nothing to me!

Anyway, glad to have been of help

Plym

[susiewong]

Hi, I am new to this and would appreciate some advice. My Partner lived in his council flat for about 11 years and then bought it at a greatly reduced price in July 2005. In August he moved in with me and rented it out because Council rules say he is not permitted to sell until 3 years after purchase.

H

[susiewong]

Hi, we are new to this and would appreciate some advice. My Partner lived in his council flat for about 11 years and then bought it at a greatly reduced price in July 2005. In the August he moved in with me and rented it out because Council rules say he is not permitted to sell until 3 years after purchase & the rent would pay the mortgage. He would like to sell it in 2008 when he is permitted. Would it be subject to CGT? If so would the gain be from the reduced price he paid or the market value of the property at the time of sale? Any help would be appreciated.

[plym77]

Hi susie

Please post this as a new thread as this thread has been closed, it is only by chance I came across it. I shall take a look at your query and reply over the next few days but you need to post as a new thread first (I dont know how to move it)

Regards

Plym77