My wife was gifted her parents’ bungalow about 19 years ago. They are now deceased and she is considering selling the property.
We have never lived in it but family members have. We have never charged any rent for them to live there. However, it is now empty.
We would like to know how we can mitigate capital gains tax. We would consider living in the property and treating it as our main residence but how long would we have to live there (known as ‘flipping’)?
Would it be a consideration for my wife to gift the property to me and then I sell it immediately? Also could I become a joint owner so both of us could claim tax relief when it’s sold?
Any other options or advice would be gratefully received.
Selling up: How do you reduce capital gains tax on a second property? (Stock image)
Chris Springett, partner at financial services firm Smith & Williamson, replies: I’ll start with a brief summary of some of the rules that apply, before addressing your questions.
I have assumed that you and your wife also own another property that you currently live in as your main residence.
If you sell a property that you have lived in as your ‘only or main residence’, the gain can be exempt from CGT, in whole or in part.
This is known as private residence relief (PRR). There is a period, ‘the final period exemption’, which always qualifies for PRR regardless of the property’s use during that period. This is currently 18 months but from 6 April 2020 will be reduced to 9 months.
What is ‘flipping’ and how would it apply here?
Where there are two residences, for example where one is lived in during the week and the other at weekends, it is possible to elect which is your main residence.
It is fairly standard planning to nominate one as the main residence for PRR relief and then vary this to the other property for a short period before varying it back. This is what I believe you refer to as ‘flipping’.
This may be done to lock in the final period exemption on that second property.
It does, however, expose the first property to CGT for that short period.
Ownership on its own is not sufficient and so you won’t be able to make this election currently because you don’t live in the bungalow even for just part of the time.
What if you move into the bungalow for a time?
Chris Springett: ‘If you are considering selling anyway, bear in mind the rate of CGT is currently lower than it’s been for years’
If you stopped living in your current home and the bungalow became your main residence, any periods that you actually lived in it, and the final last nine months of ownership, would be covered by PRR.
As your wife has owned the property for 19 years, this would reduce the gain by a small proportion as the relief is apportioned over the period of ownership.
If you continued to live in your current home as well as the bungalow, you could consider nominating the bungalow as your main residence.
Again, any periods covered by the election and the last 9 months would be covered by PRR.
In both the scenarios described above, PRR would be restricted should you sell your other current home.
It would not simply be the length of time living in the bungalow that is taken into account but the quality of residence, the degree of permanence and the degree or expectation of continuity.
HMRC regularly enquire into claims for PRR due to how valuable the relief is and the subjective nature of the specific rules, so you need to be comfortable that a claim for relief is supported by appropriate evidence.
Tax bill: ‘If you sell a property that you have lived in as your “only or main residence”, the gain can be exempt from CGT, in whole or in part,’ says Chris Springett
What if your wife gives you the bungalow?
Your wife gifting the bungalow to you wouldn’t reduce the CGT payable. The transfer to you is a no gain no loss transfer, so effectively you would take on your wife’s base cost.
No PRR would be available as neither you nor your wife have lived in the bungalow.
If you became a joint owner, you could use your CGT annual exemption if available (currently £12,000 each) on the sale and also any brought forward or current year losses.
This may save a small amount of tax but there may be a small cost in transferring the property into joint names.
What other measures could you take?
Other ways of mitigating your CGT bill are limited in your circumstances, but you may wish to consider the following.
1) If you are considering selling anyway, bear in mind the rate of CGT is currently lower than it’s been for years.
2) Include all your costs of acquisition and disposal along with improvements to the property when calculating the gain.
3) Use your losses – consider crystallising any assets standing at a loss in the same year to offset the gain – assuming this is also a sensible investment decision.
4) There are tight reporting and payment requirements which come into effect from 6 April 2020. If you sell a second home from then onwards it is highly likely you will need to file a special return and pay the CGT due within 30 days of completion.
Smith & Williamson wished to add the following statement to their answer to this reader question: By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing. The tax treatment depends on the individual circumstances of each client and may be subject to change in future.
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