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TonyTax
TonyTax, Tax Consultant
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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We have two residential properties with very different values.

Resolved Question:

We have two residential properties with very different values. We live in the cheaper one and rent the more expensive one. We have designated the more expensive property as our main residence for capital gains tax purposes. We believe that next year the rules change and the property you live in will be the main criteria.

We are thinking of giving the current property we live in to our children, during this tax year, and then renting it from them. We think this will create a capital gains charge for this property but will remove the risk of a capital gains charge on the other property. It would also remove this property from inheritance tax (provided we live another 7 years) provided we paid the going rent and our children declared such income to the tax authorities.

Are we correct in all this?

John and Frances
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.

Hi.

I'd be interested in knowing where you read or heard about the rules changes around property that you believe will come in next year.

I assume you made the main residence election within two years of acquiring the second. To be valid some occupation has to have taken place in the property that is not now your main home.

If you give the property that you currently live in to your children, it will be a disposal for Capital Gains Tax purposes and there is the possibility of a CGT liability but that would depend entirely on your ownership history of it including the period of time you have owned it, lived in it and/or let it, what it cost and what it is worth now. You are correct in your understanding that so long as you pay a market rent the gift will fall out of your estates so long as you live for at least seven years after making it. Your children would need to disclose their respective shares of the rent to HMRC. You should document the rental agreement to avoid problems with the tax office later.

A property which is let cannot by definition be your main residence and give you exemption from CGT for the letting period unless you cannot live in it because you or your spouse has moved for employment reasons. The fact that you plan to give away the property you live in will effectively nullify the main residence election. That is why a relief called "letting relief" exists. It was introduced to encourage property owners who wished to move to let their current home and to mitigate if not wipe out completely any CGT liability which may arise as a direct result of the letting of the property.

Take a look at the HMRC helpsheet HS283 for more information on the main residence and CGT.

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

Customer: replied 2 years ago.

Tony,


 


Your reply (para 4) implies that the fact of letting the property nullifies the fact that we elected it as our main residence. Is this true?


 


John

Expert:  TonyTax replied 2 years ago.

You only need a main residence election when you have two or more properties available for your use as residences. If one of the two that you own is let, you do not by definition have more than one home available for your use.

You might have thought that, if you only own one property which you will if you give away the one you live in, the one you still own has to be your main residence by default. If it is let and you have not moved home because your employment situation has dictated that you do, you will not qualify for main residence relief for the period that a property is let unless that period is covered by the last 18 months of ownership which you are given as a tax free period provided that the property concerned has at some point been your main home. Instead, you will qualify for letting relief for the period that the property was let.

When you calculate the gain on the disposal of a property, it is treated as having accrued evenly over the entire period of ownership and you divide the gain into complete months for ease of calculation. You can use days if you wish. Each month is then treated as a month of occupation by the owner(s), a month of letting or a month of vacancy which may or may not be covered by a main residence election. Each month can only be accounted for once.

When you sell a property, the gain for the period it was your main home either by virtue of your living there or a main residence election is exempt from CGT as is the gain for the last 18 months of ownership. The remaining gain is taxable unless the property was let in which case you are entitled to letting relief which is the lesser of:

1 £40,000 per part owner,

2 the sum of the main residence gain and the gain for the last 18 months of ownership of the property, remembering not to double count overlapping months, per part owner and

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

TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15758
Experience: Inc Tax, CGT, Corp Tax, IHT, VAT.
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