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bigduckontax, Accountant
Category: Tax
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I have a portfolio of buy to let properties and I am thinking

Customer Question

Hi, I have a portfolio of buy to let properties and I am thinking of selling one or two. One of them is really complicated, here it goes.
I have planning permission to build a 3 bedroom house in the garden adjacent to the existing property. The original house cost £185K, without planning permission, the house is valued appx at £230K and add another £40K for the garden next door with the planning permission. Now, I want to build and then sell them both, however, my tax bill will be big.
The property is co-own with my husband but he is on 40% tax bracket already and I am nearing the same, still on the 20% bracket.
My idea if to build the new house, get a bridging loan, split the deeds, then either sell them both or remortgage, however, I would like to live in the newbuild so It becomes my main residence and my tax liability will come down a lot. However, how does capital gains tax work?
The house is co-owned as tenants in common but I am thinking of changing to 90/10, me getting 90% of the share.
If I live in the new build, how long do I have to stay there for it not to pay capital gains tax on the sale of the property? Keeping in mind that the land would be valued at about 35-40K
To throw a spanner in the works, I am a USA citizen but live in the UK.
One last thing, if I leave the country for x amount of years and then decide to sell, I have heard that I am not liable to pay the same tax? and also read about
a way to save capital gains called "letting relief", how do I proved I have actually lived in the property?
Thank you.
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
Hello, I am Keith, one of the experts on Just Answer and pleased to be able to help you with your question. Before can proceed please tell me how big the overall plot is to which you refer?
Customer: replied 2 years ago.
not very, just big enough to fit a standard, smallish 3 bedroom house with a little bit of room to the side for a courtyard.
Expert:  bigduckontax replied 2 years ago.
I am sorry, but I must have an exact idea, how many acres or hectares.
Customer: replied 2 years ago.
I don't know, I have an idea as to why you are asking but it is not that big... how do I know the size? would it be in the plans?
Expert:  bigduckontax replied 2 years ago.
It would indeed.
Customer: replied 2 years ago.
sorry I cant find it, can we skip that detail for now?
Expert:  bigduckontax replied 2 years ago.
If you occupy your new house as your sole or main domestic residence you will be entitled to Private Residence Relief (PRR). PRR relieves Capital Gains Tax (CGT) at 100%. However, in this case, your PRR will only be time proportional to the overall ownership period and there will still be a CGT liability on disposal although the longer you occupy the smaller the proportion. There are two main CGT reliefs which will affect you. Firstly there is your Annual Exempt Amount (AEA), not cumulative, and currently 11.1K. The second is Lettings Relief (LR) available up to 40K, but you have to have occupied the premises before or after letting to be entitled. You could prove your occupation from your Council Tax assessments. There is a relief called Rollover Relief, but this applies only to Furnished Holiday Lettings properties. If you leave the UK and spend five whole tax years non resident you used to be from exempt CGT, but soft; under newly introduced legislation CGT applies to any property gain from an April 2015 valuation. Splitting the title from a Joint Tenancy to a Tenancy in Common will not assist you much unless disposals are long deferred. Whilst inter spousal disposals are outside the scope of UK taxation the CGT liability will be adjusted by time proportion and the possibility of an individuals' AEA not even being absorbed and thus wasted, AEA being an 'use ot or loose it' concession. I do hope to have shed some light on your tax position for you.
Customer: replied 2 years ago.
HI thanks for replying, however you kinda miss something important. One of the buy to lets, as I mentioned, has planning permission to build a plot, if I move in to the new house after I split the deeds, then that new build becomes my primary residence... I don't have to pay tax, right? even though the land was taken from the old house or this is an answer you cannot answer unless you know the size of the plot?
For the lettings relief, is there a minimum time I can move into the house? Say I move in whilst next door house is being build and that will be about 4 or 5 months...
Also you mention that a way to prove that it was my primary residency at some point is by the council tax... but I pay the council tax in all of my houses!!! SO what then? Thank you.
Expert:  bigduckontax replied 2 years ago.
Yes and no; say you bought 10 years ago, build then occupy then sell 10 years later you would be entitled to PRR for 10/20 ie 50% of the gain [for CGT this is calculated in months].. The longer sale is deferred, of course, the less proportion subject to CGT. The land size was merely because there can be CGT if the site is over the permitted area, but in your case it probably does not come into play. The general consensus of experts' opinion on this site is a 6 month occupation to be on the safe side. Well if the council tax route does not work then I would not worry. You do not usually have to prove this point and if the worst comes to the worse you could always swear an affidavit to cover the point if challenged. Pleas be so kind as to rate me before you leave the Just Answer site.
Customer: replied 2 years ago.
and the plot is about half an acre over all, including old house, and the garden where the new house will be built, so the new house would take half of that
Expert:  bigduckontax replied 2 years ago.
You do not need to concern yourself with the permitted area as ab ignition, before you even begin building, the original house and the surrounding land are liable to CGT in any event. The permitted area only comes into play where an occupier of a dwelling with land sells off part of their demense. If the land is over the permitted area then CGT would apply, but if below then PRR would apply to the whole site.
Customer: replied 2 years ago.
and what is the permitted area? What does PRR stand for? and ab ignition? Now, I am not an occupier, I rent the house out, does that mean as I am not an occupier, I will be liable for CGT if I sell and it is under the permitted area?
Expert:  bigduckontax replied 2 years ago.
PRR, as I have already told you, is Private Residence Relief. The permitted area makes the whole area buildings and land not subject to CGT if you sell part of the plot. If it is over the permitted area and you sell off some then that sale is liable to CGT, The permitted area is 0.5 hectares. If you are renting out you are not the occupier. You will be liable for CGT on disposal irrespective of plot size.