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TonyTax
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15946
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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Hi Have recently purchased a second home which is now my and

Customer Question

Hi Have recently purchased a second home which is now my and my wife's main residence.
We have kept our old house which we are going to let out. Now that the CGT tax exemption has been halved to 18 months on 2nd homes I need to know what our tax liability may be after 18 months as we have the opportunity to let our house on a 24 month let. Am worried if letting for the final 6 months could land us with a CGT liability that outstrips the rental gain for the final 6 months. Many thanks Derek
Submitted: 3 years ago.
Category: Tax
Expert:  TonyTax replied 3 years ago.
Hi.

You should refer to the HMRC helpsheet HS283 for further information on the main residence and Capital Gains Tax.

As you know, for disposals of residential property after 5 April 2014, the last 36 months of ownership exemption will be reduced to an exemption for the last 18 months of ownership.

The gain for the period the property was your main home will be exempt from CGT as will the gain for the last 18 months of ownership. So, if you sell it before the 18 month period expires, you will pay no CGT. If you sell it 6 months after the 18 month period expires, then 6 months worth of the gain will be taxable subject to the annual CGT exemption which is currently £10,900 per individual.

If you let the property for 24 months, then you would qualify for letting relief which would reduce any part of the gain not covered by the main residence exemption and the last 18 months of ownership relief by the lesser of:

1 £40,000,

2 the sum of the main residence gain and the gain for the last 18 months of ownership of the property and

3 that part of the letting period gain not covered by the last 18 months of ownership.

Letting relief will apply to each part owner so is potentially worth £80,000. Clearly, the figures are critical in this and every case is different.

You could make an election for the property you are thinking of letting to be treated as your main residence for CGT purposes but not if you let it. It cannot be your main residence by definition if it is let as it is not available to be so used. You have two years from the date of acquisition of the second property to make such an election. Where a property is jointly owned all part owners must sign an election. Of course, such an election would potentially expose part or all of any gain you may make in the future on your new property to CGT.

I hope this helps but let me know if you have any further questions.
Customer: replied 3 years ago.

Hi how should I work out the gain made on the property?

Expert:  TonyTax replied 3 years ago.

The HMRC helpsheet has some examples but I can do the calculations if you let me have the following information:

1 The month and year you bought the property and what cost? Is it in joint names?

2 Have you improved it? If so, what did the improvements cost?

3 What is the property worth now?

Expert:  TonyTax replied 3 years ago.

I have to go out for an hour or so but I will be back this evening to do the calculations of your property gain, assuming you have provided the information I asked for.

 

PS I'm back now.

Customer: replied 3 years ago.

Hi purchased in 1983 for £56,000 spent £15,000 on conservatory 15 years ago and £50,000 on an extension 3 years ago, recently valued at £565,000 sorry for late reply many thanks Derek

Expert:  TonyTax replied 3 years ago.

Can you remember which month in 1983 you bought the property? I'll post the results of my calculations in the morning as its very late now.

Customer: replied 3 years ago.

Hi we moved in May 5th 1983

Expert:  TonyTax replied 3 years ago.
Thanks.

I'll do some calculations and get back to you.
Expert:  TonyTax replied 3 years ago.

Hi again.

I've assumed that you moved into the new house this month, February 2014, and lived in the previous one until January 2014. I've also assumed that the house you are thinking of letting is jointly owned. If you sell the old house for £565,000 you will make a gain of £444,000 (£565,000 - £56,000 - £15,000 - £50,000). The figures bellow apply to each of two joint owners:

If you sell the first property in January 2016 after letting it for 24 months, by that time you will have owned it for 393 months of which you will have lived in it for 369 and let it for 24, assuming you let it this month.

The gain for the period the property was your main home will be exempt from CGT as will the gain for the last 18 months of ownership. That will account for £218,611 (£222,000 / 393 x 287). The remaining gain of £3,389 will be that part of the letting period gain which will not be covered by the last 18 months of ownership (£222,000 / 393 x 6).

As the property will have been both your main home and let you will be entitled to letting relief which will be the lesser of:

1 £40,000,

2 the sum of the main residence gain and the gain for the last 18 months of ownership of the property which will be £218,611 and

3 the letting period gain of £3,389.

Letting relief of £3,389 will cover the remaining gain and you should have no CGT to pay.

Clearly, if the property increases in value or you keep the property for longer than another two years, the calculations will need to be revisited but you have alot of potential unused letting relief to be utilised before CGT becomes an issue. HMRC may ask for sight of the receipts and invoices for the improvement expenditure.

I hope this helps but let me know if you have any further questions.

Customer: replied 3 years ago.

Hi many thanks for the reply that is very good news, we actually moved into our new house 14/11/13 and am only just now hopefully found a tenant for our old house. I did send this information earlier but it looks like I may of not actually sent it. If it was worth £600,000 in year 1 and £650,000 by end of year two would we still have no CGT to pay? many thanks Derek

Expert:  TonyTax replied 3 years ago.
Leave this with me for a bit.
Expert:  TonyTax replied 3 years ago.
So long as you sell with 18 months of moving out of the property, there can be no taxable gain so that covers the option of selling at £600,000 after a year of letting assuming you let from March 2014.

If you sell in February/March 2016 for £650,000, you will make a gain of £529,000, £264,500 each.

The exempt gain for each of you will be £258,458 (£264,500 / 394 x 385). The taxable letting period gain will be £4,028 (£264/500 / 394 x 6) and the vacant period gain will be £2,014 (£264,500 / 394 x 3).

So, you will each have a taxable gain of £6,042 which will be covered by letting relief of £4,028 and the annual CGT exemption of at least £11,000, assuming the CGT exemption still exists, and you should pay no CGT.
TonyTax and other Tax Specialists are ready to help you
Customer: replied 3 years ago.

Hi many thanks for the excellent service Derek

Expert:  TonyTax replied 3 years ago.
Thanks. Enjoy your new new home.