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TonyTax
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15708
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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My wife and I live in a house in London and also have a flat

Customer Question

My wife and I live in a house in London and also have a flat in London. The flat used to be my wife's residence. We have lived in the house for 5 years and we want to sell the flat but know that this will be exposed to capital gains tax as it's gone up massively and we've rented it out for those 5 years.
Because of the sums involved, we are thinking that we might move back into the flat for 6 months if that was allowed and if it would allow us to call the flat our main residence and therefore not have to pay capital gains?
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.

Hi.

Can you tell me if the flat is still owned solely by your wife or it is now in joint names. How long has the flat been owned? If you can let me have the following information, I'll do some calculations for you:

1 The month and year the flat was bought and what it cost to buy.

2 Did you wife move in right away?

3 The month and year she moved out and when the flat was first let. Has it been let more or less continuously since?

4 Was it ever your (not your wife's as I know that) main home?

5 The month and year the flat was put into joint names if that is the case. If it si were you living there at the time?

5 The value of the flat now.

Customer: replied 2 years ago.

Hi there,

Answers after your questions:

Can you tell me if the flat is still owned solely by your wife or it is now in joint names. How long has the flat been owned? Solely owned by my wife

If you can let me have the following information, I'll do some calculations for you:

1 The month and year the flat was bought and what it cost to buy.

About 15 years ago and cost £150k

2 Did you wife move in right away?

Yes

3 The month and year she moved out and when the flat was first let. Has it been let more or less continuously since?

Moved out 5 years ago and mostly rented since

4 Was it ever your (not your wife's as I know that) main home?

Before we married we lived there together but I had a rented flat too

5 The month and year the flat was put into joint names if that is the case. If it si were you living there at the time?

Never put into joint names

5 The value of the flat now.

£850k

Just so you understand, I know that there is a calculation of how much capital gains we would have to pay based on the number of years lived in compared to rented etc. However, what we are trying to understand is if there is a legal way to completely avoid the tax. If we moved in and lived there for 6 month then sold it, would that count as our main residence and therefore avoid the tax.

Thanks,

Pete

Expert:  TonyTax replied 2 years ago.

Thanks for the information.

I'll tell you the rules and leave out the calculations. You might refer to HS283 here for more information on the main residence and Capital Gains Tax.

It's not simply a matter of a property owner moving into a property that has been owned by them for 15 years, only a third of which it was occupied by that owner, living in it for six months before selling it and expecting to pay no Capital Gains Tax. Whether there will be tax to pay will be dependent on the facts and figures.

As things stand, the gain for the period that the property was your wife's main home will be exempt from CGT as will the gain for the last 18 months of ownership (reduced from the last 36 months for disposals after 5 April 2014). That covers about 6.5 years. The remaining gain is potentially taxable. However, as the flat has been let as well as having been your wife's main residence at some point, she will be entitled to letting relief to reduce the potentially taxable gain and this will be the lesser of:

1 £40,000,

2 the sum of the gain for the period that your wife lived in the property and the gain for the last 18 months of ownership and

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

If you moved into the property for six months, that would not make much difference as the gain for the last 18 months of ownership will be tax free in any event.

If you put the property into joint names before it is sold but without you (as opposed to your wife) having lived there during your ownership of a share of it, whilst the pre-reliefs gain would be divided between the two of you equally, you would not be entitled to a share of the main residence relief accrued by your wife. You would also not be entitled to any letting relief as the flat will not have been let during your ownership of a share of it.

In order for you to be entitled to the same reliefs as your wife on your share of any gain and for your taxable gain to mirror hers, you would need to be living in the property and it would need to be your main home at the time of the transfer into joint names. In addition, letting relief is only available to an individual when the property concerned has been both their main home and let during their ownership of it or of a share of it. That means you would need to live in it for a while and then let it again before you sell it.

HMRC have recently been winning tax tribunal cases against property owners who, in order to try to wipe out or reduce substantially a taxable property gain are living in it for a short period of time in order to accrue reliefs before selling it. I suspect that a six month period of occupation would be challenged by HMRC and you would need to be looking at living in it for at least a year and even then your motives may be challenged. Where the motive for a course of action is tax avoidance as opposed to making a property a home, HMRC will seek to tax the otherwise exempt part of the gain.

There are two rates of CGT, 18% and 28%. The rate or combination of rates that are paid is determined by the level of the income of the individual(s) who made the gain in the tax year it was made.

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

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