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Capital Gains tax on property

Practical Issues
smokey01
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Capital Gains tax on property

#417816

Postby smokey01 » June 7th, 2021, 8:15 am

I am selling my main residence but purchasing my next house before my sale goes through. How do I stand regarding capital gains tax? I have just read I only have 9 months to sell my old house instead of 18 months. That is scary if my sale falls through.

I do intend to still keep my old house as my main residence until it is sold and the new house I would term a second home, but not sure that matters to the tax man??

88V8
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Re: Capital Gains tax on property

#417843

Postby 88V8 » June 7th, 2021, 9:55 am

smokey01 wrote:I am selling my main residence but purchasing my next house before my sale goes through. How do I stand regarding capital gains tax? I have just read I only have 9 months to sell my old house instead of 18 months. That is scary if my sale falls through.

I do intend to still keep my old house as my main residence until it is sold and the new house I would term a second home, but not sure that matters to the tax man??

Better make sure it doesn't fall through. Have you sold a house before? Not being funny, but do you know how?

Your new house will be a second home for tax purposes which means you will pay an additional 3% stamp duty. Under current regs this can be reclaimed if you sell your first home within three years.

V8

genou
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Re: Capital Gains tax on property

#417849

Postby genou » June 7th, 2021, 10:24 am

88V8 wrote:
Your new house will be a second home for tax purposes which means you will pay an additional 3% stamp duty. Under current regs this can be reclaimed if you sell your first home within three years.

V8


Just for completeness - in Scotland the time limit to reclaim Additional Dwelling Supplement is 18 months

Gengulphus
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Re: Capital Gains tax on property

#417872

Postby Gengulphus » June 7th, 2021, 11:15 am

smokey01 wrote:I am selling my main residence but purchasing my next house before my sale goes through. How do I stand regarding capital gains tax? I have just read I only have 9 months to sell my old house instead of 18 months. That is scary if my sale falls through.

I do intend to still keep my old house as my main residence until it is sold and the new house I would term a second home, but not sure that matters to the tax man??

The first thing that happens with respect to CGT is that when you purchase your new house and start using it as a residence (whether or not you use it as your main residence), the rules about having two or more residences come into effect. Those basically say that you have two years to nominate which of your residences is to be treated as your main residence - you can nominate either of them regardless of whether you actually do use it as your main residence. If you make a nomination, you can subsequently vary it, and such a variation can be backdated up to 2 years.

If however you fail to nominate one of your residences as your main residence, the question of which was your main residence will be decided on the facts. Looking at the list of factors that might influence the decision in https://www.gov.uk/hmrc-internal-manual ... al/cg64545, it seems to be very much a judgement call - and note that that link says the list is not exhaustive, i.e. there could be yet more factors that influence the decision. So if you want the position about which house counts as your main residence to be clear, the safest way is to make a nomination; failing that, make certain the facts about where you're mainly living are clear and as far as possible all point in the same direction.

The time period that changed from 18 months to 9 months is for the 'final period exemption': if a house of yours has ever counted as your main residence, the last 9 months (which used to be 18, and even longer ago, 36) of your period of ownership will be exempt from CGT whether or not it counted as your main residence during those 9 months.

So if (as I imagine) avoiding CGT on the sale of your old house is the main issue you have, you basically want to nominate your old house as your main residence until it's sold. The drawback of that is that your new house won't be exempt from CGT until it becomes your main residence (unless of course another exemption applies) and so you are likely to face CGT on it if and when you eventually sell it. Whether that's particularly important to you will depend very much on your circumstances - e.g. if you expect to sell and buy another house again because your job is likely to take you to another area of the country in five years' time, it might be quite important; if you're retiring and moving to the house where you intend to live for the rest of your life, it might be of very little importance.

You can mitigate that drawback by varying your nomination to make your new house count as your main residence from 9 months before you eventually sell it, or the date that you bought your new house (and it became a residence of yours) if that turns out to be less than 9 months earlier. That way, the old house is still completely exempt from CGT due to always counting as your main residence or being in its 'final period exemption', and your new house's period of not being exempt from CGT is shortened by 9 months.

I should say that all of that is a bit of a broad-brush picture - it lacks details such as exactly how to make a nomination, precise rules about dates, etc. That's partly due to me only really knowing the broad-brush picture, and partly to the full picture being a big one: I recommend some detailed study of the pages https://www.gov.uk/hmrc-internal-manual ... l/cg64200c links to (especially the "Identification of the only or main residence" link) if you want that full picture - but do that study when you've got plenty of time available and are feeling clear-headed!

As 88V8 has mentioned, stamp duty is also a factor to consider, though the 3-year time limit for it is quite a bit less constraining.

Gengulphus

smokey01
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Re: Capital Gains tax on property

#417923

Postby smokey01 » June 7th, 2021, 1:28 pm

Thanks Gengulphus for the detailed reply.

I don’t think having the 2 homes is a path I want to go down. I have bought/sold a house before and am fully aware of the second home stamp duty and that capital gains tax could become an issue, but up until today thought I had 18 months rather than 9 months before the possibility of capital gains came in.

Yes maybe I would be ok by making sure I keep the old house as the primary residence but as my gain is £290,000 there is no way I am going to risk that.

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Re: Capital Gains tax on property

#418008

Postby Gengulphus » June 7th, 2021, 10:10 pm

smokey01 wrote:I don’t think having the 2 homes is a path I want to go down.

I'm not at all certain what you mean by that, because your OP starts "I am selling my main residence but purchasing my next house before my sale goes through." That says that you are going down the path of having two homes, for the period between your purchase of the new home and your sale of the old home. So as far as I can see, either you're saying that you want to keep the period that you have two homes as short as you can within that plan, or that you're changing your plans to make the sale of the old home and the purchase of the new home happen at the same time - but I don't know which!

smokey01 wrote:Yes maybe I would be ok by making sure I keep the old house as the primary residence but as my gain is £290,000 there is no way I am going to risk that.

I get the feeling you might have an exaggerated idea of how major the CGT might be... Are you perhaps imagining a 'cliff edge' effect, i.e. that if you own two houses for up to 9 months, no CGT is payable, but if you go even one day over 9 months, CGT is payable on the entire gain (which would be a CGT bill of 28% of (£290k - £12.3k CGT allowance) = 28% of £277.7k = about £77.8k (assuming you're a higher-rate taxpayer and have no other capital gains and losses)?

If so, I can reassure you that it doesn't work like that: the gain only becomes taxable gradually if you go over the 9 months limit. As an example of how it works, suppose you've owned the old house for 10 years when you buy the new house, that it takes you another year to sell the old house, and that the new house counts as your main residence for the entirety of that year (either because you've nominated it to be your main residence, or because you haven't made a nomination and the facts indicate that it's where you mainly lived during that year). The CGT calculation goes roughly (*):

Entire period of ownership = 11 years = 132 months.
Exemptions cover the first 10 years (when it was your main residence) and the last 9 months (final period exemption), leaving just the first 3 months of the 11th year non-exempt.
So non-exempt period of ownership = 3 months.

Taxable gain = entire gain times (non-exempt period of ownership)/(entire period of ownership) = £290k * 3/132 = about £6.6k. This is covered completely by the CGT allowance of £12.3k, so no CGT is payable.

If it took you 18 months rather than a year to sell the old house, the similar calculation produces a taxable gain of £290k * 9/138 = about £18.9k. Subtracting the CGT allowance leaves about £6.6k taxable, which at 28% produces a CGT bill of about £1.85k. Obviously that's to be avoided if possible (and so I would be inclined to put some thought into which house to nominate as the main residence and when to nominate it), but it's comparable with the other costs of selling the house and so I wouldn't have thought of it in the "no way am I going to risk that!" category...

Obviously that's just an example, and the taxable gain could get a lot bigger if you've only owned the old house for a few years (or a lot smaller if you've owned it for a few decades...). So I'm not saying that you're making a mountain out of a comparative molehill by not understanding how the CGT calculation is done - just that what I can see indicates a danger that you might be!

(*) "Roughly" because it may be that strictly speaking, the actual calculation works in terms of days rather than months - so the fact that months contain numbers of days varying between 28 and 31 might perturb the results of the calculation slightly.

Gengulphus

smokey01
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Re: Capital Gains tax on property

#418030

Postby smokey01 » June 8th, 2021, 6:50 am

Thanks Gengulphus. I see what you mean that it is not as simple as paying capital gains on the entire amount but also it is a complexity I don’t need to get into. I have agreed with my seller that I will go down the traditional route of selling my old house/buying the new house on the say day.

bluedonkey
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Re: Capital Gains tax on property

#418050

Postby bluedonkey » June 8th, 2021, 8:55 am

smokey01 wrote:Thanks Gengulphus. I see what you mean that it is not as simple as paying capital gains on the entire amount but also it is a complexity I don’t need to get into. I have agreed with my seller that I will go down the traditional route of selling my old house/buying the new house on the say day.

I think that's a good idea, you could have ended up stranded with two houses for longer than you wished.

DrBunsenHoneydew
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Re: Capital Gains tax on property

#418359

Postby DrBunsenHoneydew » June 9th, 2021, 12:16 pm

genou wrote:
88V8 wrote:
Your new house will be a second home for tax purposes which means you will pay an additional 3% stamp duty. Under current regs this can be reclaimed if you sell your first home within three years.

V8


Just for completeness - in Scotland the time limit to reclaim Additional Dwelling Supplement is 18 months

Following a request from the Scottish Law Agents Society to Revenue Scotland to extend the period that you can reclaim ADS tax from 18 months to 24 months due to the global COVID-19 virus, the Scottish Government have confirmed that the period has actually been extended to 36 months. This extension of 18 months will allow sellers 36 months in total from the date they purchased their additional property to reclaim a refund of the ADS tax paid. The 36-month period runs from the date of settlement (ie the date on which the purchase price is paid and the keys are handed over) of the transaction that resulted in the seller owning the property that they purchased and the property that they previously resided in as their main residence that they wish to sell.


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