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TonyTax
TonyTax, Tax Consultant
Category: Tax
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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Hello, I currently own two properties in the UK; one our

Resolved Question:

Hello,
I currently own two properties in the UK; one our main family residence, and another small flat in London
I am selling the main residence (completing end of September), and understand I get capital gains tax relief on this sale. After, I would then only own the one flat in London. Is this flat in London then classed as my new main primary residence, as at this stage I will only own one property.
Specifically, if in a few months time, I wish to sell the flat in London (which will still be my only property), would I then have to pay capital gains tax on this?
Many thanks
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.
Hi.

Can you confirm that you have lived in the "main residence" for the entire period that you have owned it. Has the flat ever been your main home? Has it ever been let? How long have you owned it? What time gap was there between the property purchases?
Customer: replied 2 years ago.

Hi,

My main residence - we have lived here for 10 years and did rent it out for a period of only 3 months in 2008.

The flat in London I have owned since 2010. I have never rented this out.

We usually only go there for weekends.

I have no mortgage on the main residence. It's value is £490,000

I have a mortgage on the flat in London. It's value is approx £600,000

Expert:  TonyTax replied 2 years ago.
Thanks.

Leave this with me while I draft my answer.
Expert:  TonyTax replied 2 years ago.

Hi again.

Given that you appear not to have made an election for one of the properties to be treated as your main residence within two years of acquiring the second, the question of which is your main home will be based on the facts. From the information given, I would say that your main home is the one you are close to selling. The whole gain should be exempt from CGT apart from the period of three months of letting. However, that part of the gain should be covered easily by letting relief which you can read about in the HMRC helpsheet HS283 here. The article here may also be of interest.

As for the second property, it won't necessarily become your main residence especially if you buy another property to live in or you live in a rented property. For any part of a gain made on the disposal of a property to be exempt from CGT under the main residence rules, it has to have been your main home at some point during your ownership of it. The period that the property you are close to selling was your main home since you acquired the flat in 2010 will preclude that period of ownership of the flat being covered by main residence relief.

If you moved into the flat for a while, maybe a year, you should qualify for main residence relief for the period you lived in it and for an additional six months. The last 18 months of ownership of a property which has at some point been your main home is given as a tax free period even if you were not living in it at that time.

So, if you lived in the flat for a year and sold it after a year, then 18 months worth of the gain as a proportion of the whole gain tax will be tax free. The annual CGT exemption will cover the first £11,000 of the taxable gain (this is the current CGT exemption) and the balance will be taxable at 18% or 28% or a combination of the two rates depending on the level of the sum of the gain and your income in the tax year you sell the property.

If you don't make the flat your "main home" at all before you sell it, the whole gain will be taxable with the first £11,000 being tax free due to the annual CGT exemption.

For a disposal in 2014/15, one of the following scenarios would apply:

1 If your income in 2014/15 including taxable gains is £41,865 or less, then all the taxable gains will be taxed at 18%.

2 If your income in 2014/15 excluding taxable gains is more than £41,865, then all the taxable gains will be taxed at 28%.

3 If your income in 2014/15 excluding taxable gains is less than £41,865 but more than £41,865 when you add the taxable gains, then some of the gains will be taxed at 18% and some at 28%.

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

Customer: replied 2 years ago.

Hi Tony,

Many thanks for the detailed response.

Firstly, you are correct in that I did not elect which property would be my main residence within the first two years of owning both. However, am I able now to elect which is my main residence? Which factors would decide which is my main residence? The capital gains on our family home are a lot less (hence our tax liability smaller) - and as such we would prefer to elect the London flat as the main residence.

Secondly, is the capital gains tax relief of £11,000 applicable for every year we have owned the property? For example, having owned the London flat for 4 years, are we eligible for £44,000 of tax relief (ie £11K each year), or is it simply only £11,000 relief in total.

Please do let me know, and thanks again for your help.

Helen

Expert:  TonyTax replied 2 years ago.

You have to make the election within two years of the date of the change of the combination of homes you own. So, you have missed the boat as far as the two properties you currently own are concerned. If you had made the election, you could then have varied it at will and back date such a variation up to two years.

You don't make an election if you only have one property. As I said in my answer, you will have to make the flat your home by moving into it or buy or rent another property and make the main residence election within two years of the change in the combination of homes you have. In any event, you are not going to escape CGT altogether on the flat gain. The best you can probably hope for is to get the last 18 months of ownership as a tax free period. Take a look here for some information on some of the criteria used in determining a "main residence". You could try to claim that the flat was your main home after both properties have been sold but I think your chances of making a successful argument for that are slim.

The CGT exemption for any one tax year is a use it or lose it exemption. You cannot accumulate unused CGT exemptions I'm afraid. If the flat is jointly owned, the gain will be divided and each part owner will have a single CGT exemption, assuming it has not been used against other gains.

Customer: replied 2 years ago.

Hi Tony,

Thanks again for your reply. I have two last questions I need to ask, and then please rest assured I will rate you as excellent.

1) On the London flat, we have a mortgage. If the mortgage is 50% of the sale price, will we pay capital gains tax on only 50% of the gain, or does our liability arise on the full amount of the gain, regardless of the mortgage value?

2) What factors determine the capital gains tax liability - for example, do: mortgage payments, rennovation/development works etc help reduce the liability? (ie are they deducted from the total gain).

Kind Regards,

Helen

Expert:  TonyTax replied 2 years ago.
1 The gain will be calculated by taking the sale proceeds and deducting from those the sum of the purchase price (some of which may have been funded by a mortgage), the cost of any improvements and the purchase and selling costs such as legal fees, stamp duty, survey fees, home information pack fees, selling agent fees and other minor disbursements such as search fees etc.

2 Ignore mortgages. They play no part in the calculation of the gain on the sale of a property. As stated above, the costs of capital improvements are deductible as would the costs of a partial or complete renovation (builders, materials etc). HMRC may ask for documentary proof of such expenditure.
Customer: replied 2 years ago.

Sorry, one very last question that ahs come to mind - will my husband also be entitled to the £11,000 relief, and so as a couple, will we receive a £22,000 relief, or is it simply £11,000 in total?

Many thanks,

Expert:  TonyTax replied 2 years ago.
Every individual has an annual CGT exemption.

Each part owner of the property will be entitled to use their annual CGT exemption against all their net gains in the tax year.
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