A potential new client I met this morning has fallen out with his old accountant (fees - they have set a minimum £750 for a tax return (all clients with £+++ for additional pages) when he previously paid £350 ish !) so when I say fallen out I mean decided to switch and so I am one of three being beauty paraded.
One thing he has been advised to do and is in the process of doing is moving house into his investment property to save CGT. He naturally asked me my thoughts and said he would not do it if I thought he shouldn't.
Basically, he has been advised to move out of main home (£500k value purchased for £100k 20 years ago) into rental property he owns two miles away, (£300k value, purchased £100k 7 years ago) for 2/3 years. (Client is happy to do this, has no kids etc) and then move back and hold onto both - in the interim letting out the former main home on a commercial basis.
The reasoning being that he would significantly reduce the CGT liability on investment property (2/3 years residency plus final three years deemed) and benefit from lettings relief, whilst not paying any CGT on main home when sold as lettings relief would cover the 2/3 years out of 20+ when the property was let out
I can see no problem with this and told the chap I wanted to double check any HMRC restrictions on this before advising fully (if he engaged me only of course.....) but it seems this switch could save £40k in CGT......
Any immediate observations in case I have missed anything would be most welcome.
Replies (26)
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Genuine Occupation
You said it yourself with the question title "genuine occupation".
Is he actually going to move in or is he just going to have his post sent there?
I don't think this should be an issue
So long as the occupation is genuine (and 2-3 years seems to be a reasonable period) there can be little doubt that the second property has become his main residence. But since there might be some doubt (otherwise why ask the question) cover yourself and make an election.
Have a look at all the recent Tribunal reports on this
where the taxpayer has normally lost because he did something stupid and the actuality did not bear out the claim to have taken up full residence in the property and failed to get PPR.
So:
TC01309 TC01170TC00927TC00832TC00753
To be going on with. What he is proposing doing ought to be OK but HMRC are getting tougher on attacking claims so he must properly move in, change entries on things like the electoral register, with HMRC and banks etc., driving licence, so that when HMRC ask for evidence he has plenty to hand and does not find that they check the electoral register and he does not appear on it, or is claiming empty / uninhabitable property relief
If my memory serves me correctly
all the cases in this area jhave always been determined by the facts of the case in question. It seems to me that on the facts given there ought to be no HMRC issues
He knows there won't be full PPR on the rental property?
.....other than for the period he occupied and the additional 3 years allowed because of this, because he is also letting the property So the let period percentage of gain (outside of the aforementioned 3 years) will be chargeable to CGT.
This differs from MP's, and 2nd home owners, who don't let out out the second properties - who can "flip", with no CGT implications.
I believe I'm right on this - can someone confirm?
Need to elect
You will need to elect for the second house to become his PPR within two years of occupying it.
HTH
Malcolm
Is an election needed.....
...if he's living in one house, and letting the other? The one he's living in must be the PPR, if its the only available home.
Belt and braces
@ shoshana - correct, as I mentioned above, in that it avoids any doubt. Strictly, based on what we have been told, it isn't needed. It seems pretty clear that the investment property will, as a matter of fact, have become the main residence. If anything, he would need to make an election if he wanted to retain PPR status for the previous property. But, as Ermintrude says, if he is letting out the former home it cannot, by definition, be his residence. But, no harm in making the election.
@ Ermintrude - correct, though remember the letting relief of up to £40k
For all you mention to apply
He needs to live in the investment property for 3 years and not to sell it for yet another 3 years after this, assuming the property value stays the same, he would have a;
gain of £200,000
Less PPR of £92,300 6/13ths
Less Lettings relief of £40,000 (lower of PPR, lettings proportion of gain and £40,000)
Making a gain of £67,700 likely at 28% =£18.956
If he didnt do this I assume he pays =£56,000 (£200,000 @ 28%)
If he has a wife he might be able to move half into her name and use her basic rate band up (if applicable).
What would happen if he made it into furnished holiday lettings for 12 months, and then sold it?
MtF
Why 6 years?
If he lived in it for only 1 year and then sold it immediately,
Gain £200,000
PPR 3/8ths - £75,000
Letting relief £40,000
Taxable £85,000
CGT £23,800
OK, greater than £18,956, but not exactly £56,000!
What about Section 224(3) TCGA
I think section 224(3) TCGA needs to be watched, the query notes it is an investment property so it was not acquired with the attention (or so it apppears) of being a main residence.
Some people will say this is nonsense others may agree, but the section exists for a reason.
DG
3/8ths
Because, if a property is eligible for PPR relief, the last 36 months are always counted as occupation as PPR.
It is of course prudent to consider 224(3) but I think you, dangart, have looked at it in reverse logic. It doesn't say that relief is excluded if the property is not acquired with the intention of being a main home. It is excluded if the sole or main purpose is to realise a gain. There is quite a difference.
The subsection should only be taken to apply when the primary purpose of the acquisition, or of the expenditure, was an early disposal at a profit.
Call me pedantic or call me old fashioned
Where in the legislation is there such a thing as "PPR"? Unless I've overlooked something, there isn't. The phrase in s222 & 223 is "only or main residence", which to me abbreviates to "OMR" (and is a much more elegant and clearer phrase than the ugly, faux-technical language of "principal private residence").
Who started this mythical PPR, why do so many now use it and why won't they stop?!?
I was always taught that any tax adviser worth their salt must refer to legislation as their primary source. That's still true - so come on guys, do the job properly and let's cut out this PPR nonsense!
The clue is in the title
I was always taught that any tax adviser worth their salt must refer to legislation as their primary source. That's still true - so come on guys, do the job properly and let's cut out this PPR nonsense!
s222 - "Relief on disposal of private residence"
OK, so the words are in a different order, and "principal" is missing, but at least we have the "PR" part. And, as noted above, the term has long been used by HMRC, the courts and information sources. If we as agents suddenly started talking about OMR relief, no-one would have the slightest idea what we were on about ;)
Possibly
but we all know what we mean.
HMRC call if Private Residence relief in their manual & PPR in Tax Bulletin 12.
It is also a term used in
Kirby v HughesHenke and another v Revenue and Customs CommissionersTC01363: S HussainTC00927: Alexandra BradleyTolley's Estate PlanningTolley's Tax PlanningTolley's Property TaxationTaxationLNB NewsAssorted VAT cases
So it's not that unreasonable surely?
Then it should be "private residence relief"!
BKD - if someone doesn't have the slightest idea what "OMR" means then they can't have read the legislation, which I think should be more of a concern than a pedantic old pro like me, shouldn't it?
And, if the words are in a different order and with one of only three of them missing, well that sounds like it's not really the same then doesn't it?
Yes, I'm in a minority. Someone started calling it PPR and, for reasons best known to themselves, most people began using the phrase. That doesn't alter anything.
As a question of fact, "principal private residence" is not a phrase used in the legislation, whether or not the courts or Tolleys or Taxation or anyone else subsequently adopted it.
I wouldn't mind if it were better then the original, but it isn't. "Principal private residence" (apart from being an awkward and inelegant phrase to say) is not as precise as "only or main residence", which is a simple description of two different possible states; the only residence or the main residence. "Principal private residence" attempts to cover both states in one phrase with, it seems to me, a corresponding loss of clarity.
"Always simplify" is another lesson I learned early in my career and one that tax advisers, me included, struggle to achieve. In its own small way, PPR doesn't help and I shall go on using OMR for as long as I'm active - and make a point about it when I get the chance!
But it's a minor irritant; I'm not losing any sleep!
PPR
"a pedantic old pro like me"
"someone started calling it PPR"
"'principal private residence' is not a phrase used in the legislation"
I think if you remembered back far enough, you'd find that "principal private residence" was the term used in the legislation to TCGA 1992 (CGTA 1979). Some people just find it hard to free themselves of the old ways.
Cause for celebration
"a pedantic old pro like me"
"someone started calling it PPR"
"'principal private residence' is not a phrase used in the legislation"
I think if you remembered back far enough, you'd find that "principal private residence" was the term used in the legislation to TCGA 1992 (CGTA 1979). Some people just find it hard to free themselves of the old ways.
Really? Then you've just made my day that I'm young enough not to remember! [I'm glossing over the fact that I was using CGTA 1979 when I first entered the profession.] If it's not me that's stuck in my ways, then I rejoice!
Sorry to burst your bubble, George, but ...
... the 1979 Act also referred to only or main residence - and "Private Residence" in the title - both as per the 1992 Act.
But it's a minor irritant; I'm not losing any sleep!
Me neither
Damn...
... I couldn't get on to legislation.gov.uk to check yesterday, but I see you're right BKD.
Must have been in the original 1965 act then! :) I've called it principal private residence relief forever!
Double Damn...
I wondered why I couldn't find a Capital Gains Tax Act 1965. The tax was actually introduced in the 1965 Finance Act (surprisingly!). S.29 read:
"Private residences (29)(1) This section applies to a gain accruing to an individual in so far as attributable to the disposal of, or an interest in,-
(a) a dwelling house or part of a dwelling-house which is, or has at any time in his period of ownership been, his only or main residence..."
I admit... I've been wrong ever since I can remember
PPR for mortgage interest
Back in the day when you could get tax relief on a loan to purchase your own home, that home had to be your "principal private residence". Restricted to interest on a loan of £30k I think by Dennis Healy in his 1974 budget. Yes, that's right, I was studying tax at nursery school in 1974.
The fight continues
I hope that anyone who's read the PPR/OMR discussion will recall it whenever they find themselves using the non-legislative, tongue-twisting PPR phrase or, better still, will use OMR instead.
At least you'll struggle to forget it!
My work here is done .... until next time!