I own a house comprised of two flats. I have been living in one of the flats for several years. Due to financial difficulties, I now need to sell one of the flats.
I gather I can avoid capital gains tax liability if I just sell the flat I have been living in, as that would be my primary residence. The problem is, it's the other flat that I'd prefer to sell.
If I move into the other flat temporarily, prior to selling it. Would that absolve me of capital gains tax liability? if so, how long would I have to live there?
If not, how much capital gains will I have to pay if I get £115,000 for one of the flats?
It's not quantity but quality of occupation that matters. A few weeks would probably suffice, but if you moved in without the intention of making it your permanent home, i.e. if it were simply a blatant CGT avoidance attempt, it might not work. What would you do afterwards? Move back into your present flat?
Depends. How long have you owned it? How much did it cost when you acquired it?
Did you own the house before it was divided into flats? Was the whole house your home before it was divided? Is the other flat rented out?
Possibly, yes, at some stage. Either that, or I will sell that flat too and move in with a relative until I find a new place to buy and move into.
16 years.
I paid £40k for the whole building and converted it to two flats shortly after buying it (within a year, I think).
Yes.
Yes, briefly.
Is the other flat rented out?
The one I want to sell is currently rented. The tenant is due to move out in a couple of weeks. Then I plan to move into it, prepare it for sale, then try to sell it. As soon as I move into it, I will try to get a tenant into the flat I am currently occupying.
BTW, who is it that usually informs the IR of the details of any house sale? Do they get the information purely from people's tax returns, or what?
OK. Let's say you spent another £10k in carrying out the conversion. Let's say the flats are of equal value (if they're not, just adjust the figures yourself). So the acquisition cost of the one flat would have been half of £50k, and that makes the gain on the one flat £90k.
Deduct indexation allowance. 16 and 15 years ago (April 1991 and 1992) the indexation factors were .222 and .171, so you deduct .222*£20k and .171*£5k. That brings the gain down to £84.7k
OK, call "briefly" a year. That entitles you to 4 years private residence relief (1 actual plus the last 3 years of ownership automatically) and this reduces the gain by a factor of 4/16.
If the flat was rented for at least 4 years (not counting the last 3 years of ownership), you will get Letting Relief which reduces the gain by a further factor of 4/16, making it £42.35k.
You have owned the flat for at least 9 whole years since April 1998 (when taper relief replaced indexation allowance), and accordingly taper relief reduces the gain by 40% to about £25.4k.
Assuming you aren't making any other capital gains this tax year, deduct the £9200 exempt amount, and your bottom-line taxable gain is £16.2k. That means the maximum amoutn of CGT you will pay (if all the above circumstances are correct) would be £6.5k, and the minimum would probably be half that, and where between the min and max you lie will depend on how close you are already to being a higher rate taxpayer.
If the whole house was not your home, then your tax bill will be considerably higher because you will get no PRR and no LR, but only indexation, taper, and exemption. Only then would it make sense to try to acquire PPR status for the flat prior to selling it. That will then automatically qualify you for 3 years PRR and 3 years LR (as opposed to 4+4 in my original example).
If you do this, it will not cause you to lose PPR status for the flat you're currently living in, provided you sell it within 3 years.
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