Property and Tax Issues

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

The questions and answers are reproduced for you here.

This page contains Questions & Answers from February 2006. Older articles are accessed through our Archives page.

There is a wealth of information on these pages. If you have a specific interest, please use our Search facility.

In 1991 my wife and I purchased a newly-built holiday home in Scotland. We bought it as a shell and had to fit it out. We also had the builder do additional work. With furnishings, the total cost was £60,000. Recently, we sold it with all contents for £160,000. I assess the total value of the items as £10,000. Can this amount be deducted before calculating what is due for Capital Gains Tax (CGT)? In addition, how is taper relief calculated, and will we both be allowed our Capital Gain Allowance?

Maggie Fleming writes:

The furnishings and other items you mention are likely to be chattels - defined as "tangible, moveable property" - which are exempt from CGT provided that you do not receive more than £6,000 in respect of any one item, unless it forms part of a set. Chattels that are "wasting assets" - washing machine, dishwasher etc - are exempt from CGT. But any fixtures that are permanently or semi-permanently attached to the property will be deemed to form part of the fabric of the building and therefore liable to the tax. The exact amount attributable to chattels may have to be negotiated with your tax district.

You will be able to deduct the cost of any capital expenditure on the property, provided that it is reflected in the state of the property when sold. The new kitchen and bathrooms and other work done to enhance the property will be covered by this.

As it was purchased in 1991, you will qualify for indexation allowance on the cost of the property and improvements. This will strip out the inflationary element of the gain up to April 1998, when the allowance was abolished and replaced with taper relief. As you have owned the property since the start of the relief, you will qualify for 30 per cent taper relief. As you own the property jointly, you and your wife can each deduct a personal exemption of £8,500 from your share of the tapered gain.

I bought my present house in 1990 and lived there until 1996, when I left Britain to work abroad. In the meantime, I let the house out. I came back to the UK in July 2004 but, because I had good tenants in the property at the time and I was planning to take another job abroad, I moved into a rented property instead.

However, my plans fell through and I took a permanent job in Britain in June 2005. I then moved back into the house and have lived there ever since. I have not owned any other property during all this time. I am concerned that when I eventually come to sell the house, I will have to pay Capital Gains Tax (CGT), as it has only been my main residence for six years or so. Is this correct? I have no plans to sell at present.

Maggie Fleming writes:

Despite the fact that you have occupied the house for only six out of a total of 16 years, you will not have to pay CGT when you sell the property. There are specific exemptions that cover your periods of absence.

First, any period of absence during which you were working abroad is treated as a period of residence for the purposes of Principal Private Residence Relief (PPRR). Second, any period or periods of absence of no more than three years in total are also exempt. In each case, you must have had no other residence qualifying for exemption during the period of absence and, furthermore, you must reside in the property both before and after the absence. The need to reoccupy the property is waived by concession, however, where your absence was work-related and your work prevented you from returning to the property.

Although you will be claiming relief for two distinct periods of absence - a work-related period from 1996 to July 2004 and a general period of absence from then until June 2005 - your right to relief will not be affected by the fact that you did not reoccupy the house in between. All that the legislation demands is that both before and after your absence, there should have been a time when it was your only or main residence. Your entire period of ownership to date therefore falls within the PPRR exemption.

I inherited my mother's house when she died in December 2001. Its probate value was £90,000 and it was my only residence between January and May 2002. In June of that year I got married and bought a house with my wife, which has been our main residence ever since. My mother's old house was let between December 2002 and April 2004 and was then sold in October 2004 for £143,000. What is my Capital Gains Tax (CGT) position? Can I claim principal private residence even though I only lived there for five months?

Maggie Fleming writes:

Although your period of residence in the property was only five months, provided that it was your intention to make it your permanent home at the time you moved in, you should be able to make a claim for principal private residence relief.
If you would have continued to live there but for the fact of your marriage, you should be on strong ground. If, however, it was always your intention to put the property on the market at the first possible opportunity, HM Revenue & Customs could challenge you. You would be on very shaky ground, for example, if you had engaged an estate agent in January 2002, as this would indicate lack of an intention to make the house your permanent home.

On the assumption that the property does qualify for the relief, there is no CGT to pay, as the period between you moving out and the property being sold is less than 36 months. Even if this period were more than 36 months, a gain would be unlikely to arise because of the additional relief of up to £40,000 available where a property which has at any time been your only or main residence is let out as residential accommodation.

If there were a chargeable gain, it would have had to be shown on your 2005 tax return - the deadline for which was January 31. However, the tax return notes indicate that where a property was your only residence throughout your period of ownership (ignoring the past 36 months) and the grounds are less than half a hectare, the disposal does not have to be declared on the return.

My wife and I own a substantial property in central London. We are leaving the United Kingdom soon, because my company has posted me abroad for two years, and we want to let our property out.

The agents we spoke to suggested a "premium leasing" arrangement. Apparently, this is attractive, for tax reasons, to companies that provide accommodation to their executives. How would this affect our personal tax situation? The property would be let on a premium for two years and I understand that we would get all the income up front. Is it all taxed in the year of receipt or is the income spread over the two years? If the former, how would we get relief for any maintenance work etc done in the second year? The house is being let furnished. Because we are receiving a premium, rather than rent, would we still get the 10 per cent furnished lettings allowance?

Maggie Fleming writes:

Premium leasing is extremely tax-efficient for an employer who is providing accommodation for an employee, as the employee is taxed on only a fraction of the benefit he or she enjoys.
From the homeowner's point of view, there are both advantages and disadvantages to premium leasing. Where the lease is for more than one year, but less than 50, the amount of premium liable to income tax is reduced by 2 per cent for every year after the first. In your case, you and your wife would be taxed on 98 per cent of the premium. If the period of the rental were three years, you would be taxed on only 96 per cent of the premium. The part not subject to income tax is a capital receipt.

The main disadvantage is that the whole premium received (less the 2 per cent) is taxed in the first year and therefore your personal allowances, and lower and basic rate bands of the second year, are wasted. If the premium is sufficiently large, you could find that you are both paying tax at the higher rate of 40 per cent in year one also.

There is no relief available for any expenses incurred in the second year of the let. Any loss created by the expenses would have to be carried forward against subsequent rents from this or another property. If you never let a property out again, the losses would never be relieved.

The 10 per cent "wear and tear" allowance would be available in the normal way if the property were let furnished.