Heard in the Golf Club Bar – Avoiding CGT on Let Property (1)
As promised, this is the first of a series on popular “tax wheezes” you may have heard about from a friend – and whether they actually work.
A perennially popular subject is property and, in particular, what happens when you come to sell a property that is not your main home. It may be a holiday cottage, in the UK or abroad, or buy-to-let investments purchased for income. Most people are very aware of the costs of purchasing such properties, and the regime for tax treatment of the income is well understood and quite generous. It is well known, for instance, that interest on mortgages taken out to purchase a buy-to-let property (which, as is less well known, do not actually have to be secured on that property itself to qualify) can be off-set against the rental income, as can all normal maintenance expenses. What comes as more of a shock is the tax consequences of sale, particularly Capital Gains Tax (“CGT”): and it is here that the myths start to come thick and fast.
The first saloon-bar myth concerns property overseas: “If you pay whatever tax is due in the foreign country, you don’t also have to pay it here”, they say down at the golf club. Not so. If you are a UK resident disposing of an asset, even if it is abroad, you are potentially liable to UK CGT whether or not taxes also apply locally. Of course, there are tax treaties between many countries as a result of which you may be able to claim a relief from double taxation, but these treaties are not all exactly the same and the foreign taxes may not be directly comparable to UK CGT so you should check very carefully what is covered and what is not, before making the decision to sell.
Then there’s the “I’ll call my second home my main home” theory. The first reaction of some people selling their lovely country or seaside holiday cottage in somewhere like Devon or Norfolk (which has probably increased in value very nicely over the years) is to say – “Oh crikey – CGT – hadn’t thought of that. Still, we have actually lived there for longer than two weeks at a time, especially when we were doing it up when we first bought it. We can just get the exemption for selling your own home, can’t we?” A quick straw poll at the golf club will tell you this sounds like a reasonable shout, because “the Revenue aren’t interested in people selling just one cottage” or “so long as the bills are in your name it’s OK – they can’t prove you weren’t living there” or “you can always give notice which one is your main residence – those MPs do it all the time and its perfectly legal”. Er, no.
The situation is that, when you purchase a second home, if you occupy it as your “only or main residence” you can take advantage of an exemption from CGT. HMRC are acutely aware, however, that holiday cottages may not be used sufficiently continuously for them to have the character of a “residence” at all, particularly if you have filed income tax returns showing that the property has been let for much of the time you have owned it. Now, if you can establish use of the property by you as a “residence” this is good news, because not only can you get the exemption for the “residence” period of your ownership as a proportion of the whole period of ownership you can also benefit from an extra “permitted period of non-occupation” of 18 months as part of the calculation.
You can only use the exemption if it is your “main” residence, however, so how do you establish that (especially if you only use it for extended holidays)? Well, if you had been properly advised at the time you purchased the holiday cottage, you could, within two years, have sent a notice of election to HMRC telling them that, of the two properties, it is the holiday cottage you wished to treat as your main residence (as that is the one you were most likely to sell, making it the one you wanted to use for purposes of the CGT exemption). Moreover, if this became inconvenient (perhaps because you decided to sell the family home but keep the holiday cottage) you could have changed that election (this is the “flipping” that a lot of MPs were found to be doing when the expenses scandal was in all the papers). The chances are, however, that you didn’t originally make an election within the two-year period, because not many people are as well-advised as MPs are, or think much about CGT when buying a holiday cottage. In that case, which of two properties is the “main” residence is a matter of fact. Sadly, the golf club bar tab shows that you don’t spend much of the year in Devon so………this is going to be expensive.
Many people say “I’m a basic rate taxpayer, so it’s only 18%, isn’t it?”. Again, not quite. The way the system works is that gains below the higher rate threshold are taxed at 18% but anything which, when combined with your income, is above that is going to be taxed at 28%. Since the gain normally all arises in the same tax year, the amount payable can be quite eye-watering, even for people whose other income is modest.
Even at this late stage, there are likely to be some other things you can do to reduce the CGT bill. There may be allowances or reliefs you may not have thought about that can properly be claimed, but a “get out of jail free”? Unlikely, I’m afraid.
In the next article in this series I’ll continue the theme of holiday homes and buy-to-let property