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bigduckontax, Accountant
Category: Tax
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My wife and I have two homes one in the city where I worked

Customer Question

My wife and I have two homes one in the city where I worked and one in the country where I lived at weekends and my wife lived all week. I am now retiring and considering what my future options are. The city propriety has escalated in value significant but I understand I will now be liable to be 40% of this gain if I sell this property and am considering what my other options are:
If at some point in the future I sell my main residence (which I understand would not be liable for capital gains tax) and then move into my city flat - am I always liable for the gain in property value during the period it was not not nominated as my primary resistance or is there a period of time at which I would no longer be liable?
I rent the property out I will have to pay tax on the lettings but is there any other advantage to this?
Are there other options to limit the liability of capital gains in the future?
What expenses can we offset against this allowance - we did a lot of work initially on the property - and lived there for a short period does the escalation of value whilst doing those works exempt because we lived there and hadn't purchased our primary residence at that point and how would we prove that?
Thanks
Submitted: 1 year ago.
Category: Tax
Expert:  bigduckontax replied 1 year ago.
Hello, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question. Firstly you appear to be mixing taxes. 40% tax looks like Inheritance Tax (IHT) and as neither of you is deceased [remember Benjamin Franklin's adage that in life there are but two certainties, death and taxes!] that tax does not apply, yet. The rate of Capital Gains Tax (CGT) is 18% or 28% or a combination of the two rates depending on your respective incomes including the gain in the year of disposal. Furthermore there is no CGT on death, all assets being aggregated and exposed to IHT. Firstly married couples only have one tranche of Private Residence Relief (PRR) between them. PRR relieves CGT at 100%. When a second property is acquired you have two years in which to notify HMRC to which you wish the PRR to apply. You have not formally indicated whether you made such an election and I have proceeded on the assumption that you did not. In the event of no election HMRC will apply the PRR on the facts. From the tenor of your question I suspect that HMRC will deem your country residence the one to which PRR applies. This mans that your city residence will attract CGT on disposal. CGT is applied to the gain which is the difference between the acquisition and the selling price. The acquisition price is what you paid for it plus buying costs including Stamp Duty or its equivalent plus improvements eg installation of double glazing, central hearing, extensions, but not routine maintenance which can be offset against rental income for periods of letting. The disposal price is the net receipt, the selling price less the costs of sale. From this gain (half each) can be deducted your Annual Exempt Amount (AEA), currently 11.1K and, if it has been let out, lettings Relief (LR) up to 40K depending on the rentals received. Half of the net rentals is liable to Income Tax (IT) and must be declared on your individual annual self assessment tax return; you are deemed to receive these 50/50 as your properties are held as Joint Tenants. Once one of these properties is sold then PRR will apply to the other. That is about as far as I can go in a general answer without more details of elections, letting periods, etc. No doubt you will, like MacArthur, wish to return!
Customer: replied 1 year ago.
Thanks for the response. Yes we never formally elected a residence although as you say I would imagine my country residence would be deemed to be the main one. The city property has never been let (it was just an idea for the future alongside sale) and we wondered if we sold our main residence and moved into the flat in the city whether that would reduce the capital gains as payable if we then decided to sell that aswell and buy something smaller later in life?
Expert:  bigduckontax replied 1 year ago.
Well, yes that would reduce the liability somewhat as your country property would escape CGT through PRR. Once disposed of then the city flat would begin to accrue PRR and the longer you remained in occupation the lower the percentage of the gain which would be exposed to CGT less, of course, the AEA.
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Customer: replied 1 year ago.
OK thanks but to clarify - are we always liable for the gain during the last 10 years even if we move into the property - how is this calculated? Are there other options eg if we gift the property is capital gains still owing?
Expert:  bigduckontax replied 1 year ago.
Gifting the property constitutes a disposal and CGT will kick in on the donation based on the current market value less the acquisition cost.
Yes, you will always be liable for CGT on a proportion of the gain, but that will reduce in time. Say it was bought 10 years before you occupied it as your sole or main domestic residence and sold it after five years then 10/15 [66.6%] of the gain would be exposed to tax. If you disposed after 10 years then 10/20 [50%] would be caught by CGT.
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Experience: FCCA FCMA CGMA ACIS
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Expert:  bigduckontax replied 1 year ago.
Thank you for your support.

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