Concerns are already growing amongst property owners as to how the imminent increases in capital gains tax (CGT) and stamp duty could affect future property sales.
Recently we were approached by a newly-wed couple, both of whom owned their own flats. They were planning to sell one of the flats to raise the down payment for a house but keep one flat as an investment. They wanted to know if they would be better off selling both flats and buying one together to avoid the additional tax penalties, especially as the extra 3% stamp duty would have a direct effect on their price range.
The first thing we explained was the 18-month rule associated with 'private residence relief'. This relief ensures that any gains you make on the sale of one of the properties would be free from CGT as long as
a) it was used as your main residence and
b) is sold within 18 months of moving out.
We then explained that even if both flats were main residences before the couple moved in together, once the couple married only one of them would be eligible for private residence relief (although the decision on which flat should enjoy the relief would be the couple's decision). In order to apply for private residence relief the couple needed to write to HMRC to nominate which property they wanted to be considered their main residence for CGT purposes within the first 2 years of their marriage.
Thankfully neither of the flats had been let out as a rented property and can’t be nominated!
Looking forward we also explained that if the couple decided to keep both the existing flat and the new house they would have a new 2 year period in which to confirm whether their new primary residence was the flat or the house. However if they didn't formally nominate, certain facts would decide which property would be considered the main residence when the time to sell came around. To avoid the additional 3% they would need to make sure those facts made it totally clear they were selling the property they were living in and that they were buying another home to live in.
As there will always be a question mark as to whether the decision would fall their way, our advice is it is always best to provide your nomination, in writing, to HMRC and avoid any doubt or uncertainty in the future.
If you have a question about any issue relating to the tax liability of a property (or about anything else relating to your personal tax) we'd strongly recommend you take professional advice before making a decision.