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TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15977
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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I have a question about property tax. I bought my current

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I have a question about property tax.
I bought my current 2 -bed freehold house in January 2007 - purchase price approx £500K
I added value to the property by converting the loft to a third bedroom over the following 12 to 18 months at a cost of approx £50K
The property is now (Nov 2015) valued at approximately £1.1M - so a gain of £600K on the purchase price.
There is a modest outstanding mortgage on the property.
I would like to purchase a second property in Q1 2016 (taking a mortgage to do so). I plan to live in this property and let the property that I bought in 2007.
What are the implications for capital gains tax for this arrangement for both properties? In particular how can I be sure that I do not end up paying capital gain on the £600K?
Hi. You should take a look at HS283 for more information on the main residence and CGT. If you sell the first property within 18 months of moving out, the whole gain will be exempt from CGT assuming that you lived in the property from when you bought it until you moved out. If you buy a second property, you have two years from the date that your combination of homes has changed to elect for one of the properties to be treated as your main home for CGT purposes but such an election wouldn't be effective because a property which is let is not available to you to live in as your main home. The first property would need to be left vacant for a main residence election to be effective. However, if you let the first property, you will qualify for letting relief (see Example 9 in HS283) which may reduce the taxable gain by up to £40,000 per part owner. Assuming the first property is let, the second will be effectively be your main home for CGT purposes and, if you remaim there until you sell it or sell it within 18 months of moving out, the gain will be exempt from CGT under the current tax laws. I hope this clarifies your situation, thought it won't necessarily help you avoid paying tax on all your potential profit from a future sale of the first property.
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