NO CGT ON BTL PROPERTIES?
A popular piece of tax planning for buy-to-let investors is to move into a
property and live in it for a few months before selling it, thus attracting
the exemption from CGT for a “main residence” for the last three years
of ownership, together with the “letting exemption” of up to £40,000
per owner.
In the case of a property that has been owned for a number of years,
and which has a large capital gain that will crystallise on sale, there may
still be tax payable even after these reliefs have been claimed.
Nick owns a BTL property which he bought in May 1993, and has let ever
since. It cost him £125,000 and is now worth £350,000. If he and his wife
(who does not own a share of the property) move into this property and
live there for a year before selling it in May 2013, three twentieths of the gain of £225,000
will be exempt from CGT, leaving £191,250 chargeable. After the £40,000 letting exemption
and Nick’s annual exempt amount of £10,600, the taxable gain is still £140,650, meaning CGT
payable of £39,382.
In the right circumstances, it would be possible for Nick to avoid paying all this tax. A popular
way to reduce the tax payable is for Nick to give his wife a half share in the property shortly
before sale, thus bringing in her £10,600 annual exempt amount, but we can do better
than this.
A gift between a married couple or civil partners is deemed to occur on a “no gain, no loss”
basis, but there is a specific rule relating to a gift of a main residence – not only does the
spouse receiving the gift take over the giver’s base cost, she also takes over the history of
ownership. If Nick were to give the property to his wife while they were living in it as their
main residence, she would make exactly the same gain as he would and nothing would have
been achieved.
This does not apply to any other gifts, so what Nick needs to do is to give his wife the
property while it is still being let. Say he makes the gift in May 2012, and he and his wife
move into the property when the tenant leaves in July 2012. She sells the property in July
2013, after they have been living there for a year.
Nick’s wife is deemed to have owned the property from May 2012, and at the time of the
sale it is her and Nick’s main residence, so the whole period of her ownership is included in
the exemption for the final three years of ownership, and there is no CGT to pay.
Nick and his wife have another property that is their home, so it is important that when they
start using the ex-BTL property as a residence, they make a nomination under section 222(5)
of the Taxation of Chargeable Gains Act, specifying that the ex-BTL property is to be treated
as their main residence. As husband and wife, they both have to sign this, even though it is
Mrs Nick who owns the property. It is not essential that they show that the BTL property is
actually their “main” residence; simply that they can demonstrate they are using it as one of
two residences.
This is quite provocative tax planning, and Nick needs to get help from a good tax adviser to
make sure he and his wife get the details right. HM Revenue and Customs cannot attack the
basic planning which relies on the plain words of the legislation, but they can and will attack if
the plan has been sloppily executed and details have been forgotten.
This article by James Bailey first appeared in Tax Insider magazine (www.taxinsider.co.uk)