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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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In 1998 I bought a flat and lived in it with my family

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Hi
In 1998 I bought a flat and lived in it with my family until 2006 when I purchased a second property. My family moved but I continued to use the flat as it was close to work and going to the new house only at weekends. I have taken a lodger at the flat from Oct 2014 until present. I am considering selling the flat and would like to know if I need to pay CGT and if so, how much and what other measures could I take to help reduce it even more? I did not elect which property to be my main residence as I did not know at the time. I paid £70k for the flat and it is currently worth around £500k.
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.
Hi.

Does your family ever spend any time at the flat close to where you work? Assuming you have children, are their schools close to the "weekend" home? How many children do you have? How many bedrooms does the flat have? Do you and your spouse both own both properties? Where do you all your bills and correspondence get sent? Where do your friends live? Where is the centre of your social life?
Customer: replied 2 years ago.

I have a wife and 2 children. We all lived at the flat from 1998 to 2006 with the children going to school locally. After 2006 they moved to the new house and went to school there.

The flat has 2 bedrooms. My wife and I own both properties. I receive utility bills at both addresses, tv licence at both addresses, council tax at both addresses, my tax returns go to the flat, my wife's P60 went to the flat until 2011, we are both registered to vote at both addresses, my bank statements and credit card bills go to the new house, my wife has bank statements going to both addresses.

I have my mother, brother, nieces, uncles and aunt living minutes away from the flat still. We have friends who live near the flat but we also have new friends who live near the house.

As my wife still works part time near the flat, I would say that we both have social lives equally at both places.

I'm not sure about your 1st question about the family spending time at the flat. After 2006 they moved to the house so they only visited the flat on some weekends and holidays to see other family.

Expert:  TonyTax replied 2 years ago.
Thanks.

Can you tell me what month in 1998 you bought the flat and what month in 2006 you bought the house.
Customer: replied 2 years ago.

It was July 1998 and April 2006.

Expert:  TonyTax replied 2 years ago.
Thanks.

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

Hi again.

Since you didn't make a main residence election, the decision as to which of the two properties is your main home will be based on the facts. Having read what you typed in your last post, I'm afraid that it will be a tough nut to crack for each of yourself and HMRC. The fact that you have a lodger does not impact on your claim to main residence relief.

If you took the view that the house became your principle private residence from April 2006, then the £430,000 gain from selling the flat for £500,000 having paid £70,000 for it will be split as follows:

Exempt gain £233,970 (£430,000 / 204 months x 111 months), £215,000 each

Non-exempt gain £196,030 (£430,000 / 204 months x 93 months), £98,015 each

Of each of your non-exempt gains, the first £11,100 would be tax free due to the annual CGT exemption for 2015/16 (assuming the property is sold in July 2015) leaving you each with a net taxable gain of £86,915. Take a look here to see how CGT is calculated.

Your CGT rate or combination of rates (18% and 28%) will be determined by the level of the sum of your income and net taxable gain in the tax year you sell the flat. The highest each of your CGT liabilities could be £24,336 (£86,915 x 28%).

Accepting that the flat ceased to be your principle private residence from April 2006 will protect the inherent gain in the house from CGT.

As I stated above, this will be a difficult case to argue either way. What you need to consider is how much of the house inherent gain you are potentially exposing to CGT if you try to claim that the flat was your main residence for the entire period of ownership and what your long term plans are as far as continuing to live in the house are concerned. There isn't really anything you can do to reduce your liability on the flat other than not to sell it and, instead let it for a number of years so that on a future disposal, you may benefit from letting relief if it still exists at that time. Letting relief can be worth up to £40,000 per part owner as you will see in HS283 here.

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

Expert:  TonyTax replied 2 years ago.

A correction. The figure next to the bracketed exempt gain calculation should read £116,985, not £215,000.

Customer: replied 2 years ago.

Did you receive my last question about lettings relief on a lodger and my business loss in 2013?

Expert:  TonyTax replied 2 years ago.
No, I didn't I'm afraid.
Customer: replied 2 years ago.

If I assumed that the flat is my 2nd home, then would having a lodger entitle me to lettings relief? Is a lodger the same as a letting? Is there a minimum time limit to qualify for lettings relief?

In November 2013, I sold a business with a loss of £17k. Can this be offset against CGT?

Expert:  TonyTax replied 2 years ago.
Take a look at the top of page 3 of HS283 here. One lodger does not restrict your claim for main residence relief so letting relief is irrelevant as you can only claim one relief against each month of gain. If you had more than lodger then you lose part of your main residence relief claim but may be able to claim letting relief.

A capital loss from the disposal of a business can be offset against gains made in future tax years so long as it is not absorbed by other gains in the same tax year that it was incurred or by gains over and above the annual CGT exemption in a later tax year but before the tax year that you make the gain on the flat.
Customer: replied 2 years ago.

According to my calculations the gain on my house is about half as much as the gain on the flat if it was sold now. What would you do if you were me? Would you ask HMRC directly?

Expert:  TonyTax replied 2 years ago.
I I can't say what I would do with any certainty. I wouldn't ask HMRC in advance. I'd have to take account of what I thought would happen to property prices and my long term plans for the house I also own.

If I sold the flat I'd probably claim main residence relief on the whole gain, fight my corner and if ultimately lost, pay the tax and take solace in the fact that, at worst, the CGT would only be 11% of the gain. You may have to pay interest and penalties but you could buy a certificate of tax deposit to negate such charges.
Customer: replied 2 years ago.

Thanks for your thoughts. However I don't understand your last paragraph 'at worst, the CGT would only be 11% of the gain'.

Also what is a certificate of tax deposit?

Expert:  TonyTax replied 2 years ago.
The highest rate of CGT is 28%. If you each had a taxable gain of £86,915, the CGT could be no more than £24,336 each. That's £11.32% of £215,000.
Customer: replied 2 years ago.

Thank you for your time. There are a few more other things I'm still unclear on and would like to ask more but I need to go as it's very late now. So far I've been satisfied with the answers.

Expert:  TonyTax replied 2 years ago.
OK. We can pick it up tomorrow.
Customer: replied 2 years ago.

Hi, carrying on from yesterday, can I elect a main residence if I buy a 3rd property and what impact would it have on the previous 2 homes?

Expert:  TonyTax replied 2 years ago.

If you buy a third property, you have a new two year window to make an election for one of the three to be treated as your main home. However, you won't really gain anything as far as the flat is concerned unless you continue to own it and make it your PPR. If you let a property, it cannot by definition be your PPR. You will still have an argument with HMRC over the pre-election period. See page 3 of HS283.

Customer: replied 2 years ago.

If I let my house out now does the flat automatically become my main residence from now?

Expert:  TonyTax replied 2 years ago.
Assuming you have nowhere else to live, yes it does. However, as I said in my previous post, you cannot undo the past.
Customer: replied 2 years ago.

Ok, I understand. Assume that my flat is accepted as my main residence from 1998 to present and I let out my house (2nd home), do I qualify for lettings relief? Does this also mean that I wouldn't get PPR on the house?

Expert:  TonyTax replied 2 years ago.
If the flat is accepted as having been your main residence for the entire period of ownership, then that means that the house won't have been your main residence since you bought it.

If you let the house and then sell it, you won't get letting relief as letting relief is dependent on a property having been your main home at some point during your ownership of it. You would need to move back into it for a period before selling it. I advise people to live in a property in such a situation for at least a year.
Customer: replied 2 years ago.

Ok, in this situation, after 1 or 2 years letting the house, I move back and live in it for a year, would I get 2.5 years PPR as well as letting relief?

Expert:  TonyTax replied 2 years ago.
If you moved into the house for the last year of ownership, having let for several years, you would get the last 18 months of ownership (an additional 6 months to the year of occupation as you dont count the same month twice) plus letting relief.
Customer: replied 2 years ago.

Thank you so much for your advice. I will definitely use you again for all future queries.

Expert:  TonyTax replied 2 years ago.
Thanks. Please be sure to mention my name in the body of any future questions you may have if you want me to answer them.
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