Principal Private Residence Relief and Investment Property - tax and financial advice from independent financial adviser (IFA) Isis Financial Planners

Isis Financial Planners' Maggie Fleming answers reader's questions in Saturday's Daily Telegraph newspaper for the Property Clinic section.

There is a wealth of information on all aspects of property and tax from Capital Gains Tax and Inheritance Tax to other technical and challenging issues of this complex subject. This page shows the articles for January 2010. To browse the articles from a previous year, please visit the main Property and Tax page of this website.

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• Principal Private Residence Relief and Investment Properties - 24 January 2010
  
My husband and I own our home, worth £375,000, outright. We also have a flat on a £95,000 buy-to-let interest-only mortgage. This cost £58,000 11 years ago, was valued at £125,000 when we mortgaged it for the first time five years ago and is now worth around £135,000.One of our daughters lived there for a year about eight years ago. What are the tax implications if we decide to sell the house and move into the flat?

Maggie Fleming writes:

On the assumption that your house has been your only or main residence since you purchased it, there will be no Capital Gains Tax liability on its sale as it will qualify for Principal Private Residence Relief in full.

The flat is an investment property so the full gain (around £77,000, ignoring allowable costs such as legal fees) would be subject to CGT if you disposed of it - although you would have two annual exemptions (currently £10,100 per person) available to reduce the gain. Moving into the property would turn it into your only or main residence, qualifying in part for tax relief when you eventually sell it.

When you sell a property that has been used as your main residence for only some of the time that you have owned it the gain is calculated normally but is then time-apportioned. Let's assume that you were to sell the flat in 2014 for £158,000 after living in it for four years. The total gain would be £100,000 but four-fifteenths of that would be exempt because it would have been your main residence for four out of the 15 years you had owned it.

Even if you sold it after two years, three years would qualify for exemption, as the final 36 months of ownership are always exempt. In fact, the position is even better than that, as there is additional relief available of up to £40,000 per owner if the flat has ever been let out.

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