I would like to purchase a small one bed house. I already have a house in which we have been living in for the last 4 and a half years. The one bed house we would very likely sell in two years time and our current house we will sell in about 5 years time when our daughter moves to secondary school. We would like to take the best advantage from the Private Residence relief and pay less tax at the end. It is very likely that we have to nominate the small one bed house as our Principle residence as this would guarantee a place to my daughter in the local good school. But if we buy the one bed house with buy to let mortgage can we still nominate it as Private residence?
There's nothing to stop someone nominating a second property as their principal residence in order to mitigate capital gains tax as I explain in the following article - How to cut your tax bill on a second property.
You mention that you plan to take out a buy-to-let mortgage in order to purchase the second property, yet it would appear that you have no intention of renting it? Why use a buy-to-let mortgage at all if you have sufficient earnings which could cover a second residential mortgage?
I assume that the plan is to take out a buy-to-let mortgage because despite the higher borrowing costs the amount you can borrow won't be linked to your personal incomes - but to the potential monthly rental. If you have no intention of renting out the property then ethically it is a questionable tactic although the lender is unlikely to come knocking.
With regard to nominating a residence as your Principle residence you do actually have to live there and not just pretend to, otherwise that could amount to fraud. That means registering banks account, registering to vote etc at the new address.
Also I'd be careful regarding playing the system with regard to schooling. I completely understand your motives but some people have been caught out in the past attempting to do the same.
I hope that helps