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I am afraid as you have never lived in this property then the full gain will be liable to tax (in contrast to the fact that had you lived here, then all the gain would be exempt) and furthermore there did not seem to be an intent - at the time of purchase to ever make this your main residence. So this is a requirement for private residence relief to be considered for the duration of the time of ownership, and the fact you now plan to sell, makes this whole ownership period, and your statement - "keep ourselves in the housing market we have owned and rented out a small property"
So to suggest otherwise would be picked up and scrutinised by HMRC and disallowed.
And along with this consideration there also would have needed to be an intent to return to live in the property (which I appreciate does seem something you are willing to do) however, you fail at the first hurdle to allow private residence relief to exist.
Your next point is making an election to have this treated as your main residence, however any election for this would have to have been made within 2 years of purchase, during which time this had actually been your residence.
An election now, after all this time could only be made with a new purchase (which would allow a new election to be considered on the existing or new property.
So this is not an option, I am sorry to say.
At this stage - moving into this property will better your position, as it will allow the time you actually live in the property to be considered (make sure that you move all aspects of your live there - so change bank accounts with this address, and all other major aspects of you life such as driving licence, doctors, dentist, mobile phone contracts etc plus this will allow the award of private lettings relief, as it has then been your main residence and let out - with rents declared to HMRC.
Private lettings relief can allow up to, a maximum of £40,000 further tax relief for each of you.
Plus you both have your annual exemption allowance which allows a further £10,600 each exemption.
There is no set time limit that this has to become your main residence, HMRC allow any period of time as long as it is of a qualitative nature (so as indicated above, ALL aspects of your life are conducted from this property)
You advise that the property ownership split is 95% your wife and 5% you (or is that 90% wife and 10% you ?) - have you made this election with HMRC, with evidence to support this factor, because otherwise HMRC treat assets owned by married couples as 40/50 unless there is evidence to suggest otherwise. And if there is a mortgage on the property, I would assume that the lender also recognises this as a 50/50 split? Please advise if you have this different split election in place.
Let me have your response, to see what (if any) reliefs can be given
Dear XXXXX, Thank you for your help, but I am not clear of the best course of action. I wish to retire at the end of August 2014 but according to my calculations the Capital Gains Tax that I would owe would significantly affect what we can buy to live in. We have always been clear that this was an asset to keep up with the housing market and at the time of purchase the system spread gains over the number of years of ownership. The mortgage company and the Tax office are both aware that the property is 95% in her name and 5% in mine. We did this because I am a higher rate tax payer and my wife pays a lower rate.
At present we have tenants in the property and the idea was to serve them notice of two months and then my wife would move in to assist with the sale of the property in the spring. We are trying to sell two other properties this financial year but these will incur very little Capital Gains since these were fairly recent purchases. I would be grateful if you could advise as to how we could make this work.
A ray of hope seemed to be this £40, 000 tax relief but I have no idea whether we qualify or how we go about claiming this. Please advise.
At present I am subtracting the purchase price from the proposed selling price, proportioning the profits between us and then subtracting £10,600 from each and multiplying by 18% in my wife's case and 28% in mine.
I am not out to evade tax but I feel that I would not have been in this position if I had not been required to live in to do my job efficiently.
Could you please advise on the best way to carry this forward.
yours sincerely Peter