Pay Nothing on a Second Property
Tuesday, 16 October 2007
Information from The Times - Money Section Pre-Budget Special October 14th 2007
|
Britain's buy-to-let investors and second-home owners were handed a potential £4 billion tax boost in last week's pre-budget report. Higher-rate tax payers who invest in main market shares and investment funds are also big winners. |
|
They will save an average of more than £6000 when they sell under changes to the capital gains tax regime due to be introduced in April. With a bit of extra tax planning, they may even be able to reduce their liabilities to zero under existing rules.
Anyalysts have warned that changes could lead to a surge in selling next year, exacerbating an expected downturn in the housing market. Kelvin Davidson of Capital Economics , who has already predicting price falls of £6% over two years said: "The change in CGT rules supports our view that there will be a marked slowdown next year, as there is a risk that some landlords will rush to sell. If you bought five years ago, the rule change will make you around £10,000 better off overnight."
Property
Use both allowances
If you are married, transfer half the property into your spous's name before the sale so you can make use of two CGT allowances. A couple would benefit from a gain of £18,400 before paying CGT.
If one spouse is a basic-rate taxpayer and you are letting the propety, it makes sense to have it in his or her name until you want to sell, so you pay less income tax.
Nomintate the property as your main home
It may sound too good to be true but you can nominate a second home as your main property so that it is liable for less CGT when you sell. You must nominate your main home as your principal private residence (PPT) within two years of buying the second one. This gives you the right to alter your PPR to the second property at a later date. I
If you didn't specifically nominate a property, the Revenue would just assume your first home was the main one. Once you switch the nomination to seconde property, you will not be liable for CGT for the last three years of ownership.
Say you wanted to sell the second property after 10 years of ownership and it has risen in value by £100,000.
Normally CGT would be calculated on the £100,000 gain but if you nominated PPR, the last three years would be CGT-free, meaning your tax bill would be based on £70,000.
Warburton said: "All yu need to do is write a letter to your tax inspector within two years of purchasing your second property, nominating your main home as your PPR. When you want to sell, write another letter stating that you wouldl like to vary your election and have your second hyome as your PPR."
For a second property to qualify as your PPR, the Revenu's rules state that you may have to live there for a minimum of a week - although you would still get the three years' exemption.
In your variation, state the dates when you wish it to be your main home. Both joint owners must write to their tax office.
Claim more if your renting a property you used to live in
If the property had risen in value by £100,000 during the 10 years you owned it, CGT would be calculated on just £50,000.
If you rent a property out that used to be your main home, it will be exempt from CGT for the years you lived there, plus the last three years of ownership.
So if you lived in a flat for two years and then rented it out for a further eight years, you would only be liable for five years CGT.
Then Claiming Letting Relief
As well as the PPR relief, you may also qualify for letting relief. This is a very valuable tax break as it is worth £40,000 per owner. So if in the scenario above, where you are liable for tax on jsut £50,000, it would cut your gain to £10,000 - only slightly above your CBT.