Reader Q: I plan to sell my home and move into my buy-to-let property. Will I be liable to CGT on either property sale?
I own my property and wish to buy a second property to rent. I intend to sell my present property in 5 yrs time and move into my second property. Will I be liable for capital gains tax on either property?
Ordinarily if you were to sell a property any profit which you make is liable to Capital Gains Tax or CGT (currently at a rate of 18% for basic rate income tax payers - and 28% for higher rate income tax payers). However, you do not pay capital gains tax on the sale of your principal residence i.e. where you live – this is known as Private Residence Relief.
If you did then every time you moved home you’d be landed with a huge tax bill. Obviously, if you only own one house and live in it then this is your principal residence. But if someone has a second home or an investment property they can actually choose which is their principal residence and notify HMRC accordingly - which must be done within 2 years of switching residency. You have to actually live in your nominated principal residence to qualify for Private Residence Relief otherwise the tax man will be after you.
So assuming your current home remains your principal residence until you move into your second property then you will not pay capital gains tax on any gains on your first house. But there's a few things to think about, particularly with the potential tax liability that may arise on the sale of the second property - as I explain below.
Ways to reduce your potential Capital Gains Tax bill
There are all sorts of other HMRC rules which determine the amount of tax relief you receive on a property sale given certain scenarios such as working abroad, time between purchase and moving in, periods of inoccupation etc. But there is one rule which was created during the early 1980’s recession to aid people forced to move away in order to find work, but who were unable to sell their original home due to a depressed property market. It would have been unfair to make these reluctant landlords pay CGT on the period of time when they were having to rent out their old home through no choice of their own. A rule was introduced (often called the ‘’time to sell rule’’) which meant that if someone else was renting your supposed main property, for tax purposes, the last three years of any period of ownership would be treated as though you were still living there, and thus still qualify for tax-free status. But there is nothing to stop people using this rule in a way other than the spirit with which it was originally intended.
So in your case you could move out of your current home and into your second property, nominating it as your new principal residence. You will still not pay any capital gains tax on profits made from the sale of your first property so long as the sale occurs within 3 years of switching principal residence.
Any subsequent capital gain relating to the period of time that your second property became your principal residence will also be free of CGT. So the sooner you get in there the less CGT you might potentially pay.
Furthermore any capital gain relating to a period of renting the second property may also be eligible to Letting Relief, further reducing any tax liability.
Plus, don't forget you can use your annual tax-free capital gains tax allowance (£10,600 for tax year 2011/12) to reduce any tax bill further.
But I'd advise that you seek tax advice before you do anything.
I hope that helps
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