Question
Is it possible (and legal) to move out of ones main and current residence and live in a property that one owns and currently lets out, to live there for 6 months to mitigate any capital gains tax liability on the rented out property when it comes to be sold?
Answer
Potentially. The tax allowance that relates to this is 'Private Residence Relief', which is the one used by MPs to 'flip' second homes and avoid paying capital gains tax on profits made. While some MPs got into hot water over 'flipping', it was their own moral code of conduct that they generally broke, not the law.
Private residence relief means you don't have to pay capital gains tax on profits made from selling your home provided that it's been your only home or main residence, and you've only used it as your home, for the whole time you've owned it.
Now this might not sound very promising re: second homes, but there's a couple of very helpful provisions in the private residence relief rules.
Firstly, if you own more than one home you can nominate one as your 'main residence' by writing to your tax office. This must be made within two years of changing the number of properties you own, otherwise HMRC will instead decide which is your main residence based on facts, which could make things more difficult. So, if you buy another property always tell HMRC which will be your main residence within two years, even if it'll continue to be your existing home for the time being.
While this is good news, in that you can switch your main residence very easily (provided you've complied with the two year rule), it doesn't get around the problem that the second property probably hasn't been your man residence throughout the time you've owned it.
This is where the second provision - the one famously used by some MPs - comes in. The final 3 years that you own a property will be treated as if you lived there, even if you didn't, as long as the property has been your only or main home at some time during the period that you owned it.
Putting all this together, the following is perfectly legal:
You've lived in your family home for a number of years and decide to buy a second home, which you rent out. You tell HMRC within two years of buying it that your family home will continue to be your main residence. You decide to sell the second home within three years of buying and switch it to your main residence a week before the sale completes. After the sale you switch your main residence back to your family home.
Any profits from the sale of the second home will be tax-free thanks to private residence relief.
Of course, life won't always be this simple. You might own the second home for a lot longer than three years, in which case relief will be given in proportion to the total time you used it as your main residence. For example, you own a second home for 10 years, but only used it as your main residence during the first year you bought it. Relief is based on these 12 months plus the 36 months (last three years of ownership) out of the 120 months of ownership, so you'll get relief on 48/120 of the gain.
You can read more about private residence relief in this HMRC help sheet.
Is it possible (and legal) to move out of ones main and current residence and live in a property that one owns and currently lets out, to live there for 6 months to mitigate any capital gains tax liability on the rented out property when it comes to be sold?
Answer
Potentially. The tax allowance that relates to this is 'Private Residence Relief', which is the one used by MPs to 'flip' second homes and avoid paying capital gains tax on profits made. While some MPs got into hot water over 'flipping', it was their own moral code of conduct that they generally broke, not the law.
Private residence relief means you don't have to pay capital gains tax on profits made from selling your home provided that it's been your only home or main residence, and you've only used it as your home, for the whole time you've owned it.
Now this might not sound very promising re: second homes, but there's a couple of very helpful provisions in the private residence relief rules.
Firstly, if you own more than one home you can nominate one as your 'main residence' by writing to your tax office. This must be made within two years of changing the number of properties you own, otherwise HMRC will instead decide which is your main residence based on facts, which could make things more difficult. So, if you buy another property always tell HMRC which will be your main residence within two years, even if it'll continue to be your existing home for the time being.
While this is good news, in that you can switch your main residence very easily (provided you've complied with the two year rule), it doesn't get around the problem that the second property probably hasn't been your man residence throughout the time you've owned it.
This is where the second provision - the one famously used by some MPs - comes in. The final 3 years that you own a property will be treated as if you lived there, even if you didn't, as long as the property has been your only or main home at some time during the period that you owned it.
Putting all this together, the following is perfectly legal:
You've lived in your family home for a number of years and decide to buy a second home, which you rent out. You tell HMRC within two years of buying it that your family home will continue to be your main residence. You decide to sell the second home within three years of buying and switch it to your main residence a week before the sale completes. After the sale you switch your main residence back to your family home.
Any profits from the sale of the second home will be tax-free thanks to private residence relief.
Of course, life won't always be this simple. You might own the second home for a lot longer than three years, in which case relief will be given in proportion to the total time you used it as your main residence. For example, you own a second home for 10 years, but only used it as your main residence during the first year you bought it. Relief is based on these 12 months plus the 36 months (last three years of ownership) out of the 120 months of ownership, so you'll get relief on 48/120 of the gain.
You can read more about private residence relief in this HMRC help sheet.
Read this Q and A at http://www.candidmoney.com/questions/question408.aspx
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