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 July 2005. Older articles are accessed through our main Property Tax page.

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We are two gay men and we intend to register our partnership as soon as the new Civil Partnership Act comes into force at the end of the year. My partner has a house on the south coast, in his name alone, and I have been living there with him for the past five years. However, I kept my old flat in London and we both stay there regularly - this is in my name alone and has never been rented out commercially.

Should we put either or both of the properties in our joint names or leave them as they are? What is the Capital Gains Tax (CGT) and Inheritance Tax (IHT)position?

Maggie Fleming writes:

Once you register your partnership, you will be treated for tax purposes in exactly the same way as a married couple. This is overwhelmingly to your advantage, especially as regards IHT, as you will be able to leave your assets to each other without the survivor having to worry about paying an IHT bill.

However, one downside is that you will now only be able to have one residence between you qualifying for CGT principal private residence relief. Up until registration, you will each be able to claim full relief for your respective properties - after registration, you will have to decide which of the two properties you wish to nominate as your main residence.

You should choose the one that is likely to generate the largest gain on sale. The joint election must be made in writing to your tax districts within two years of registration and can be backdated.

As regards joint or sole ownership of the properties, there is more to consider than simply tax and you would be well advised to take legal advice. From the date of registration, you will be able to transfer assets between yourselves without incurring a CGT charge, so if in the future you decided to sell a property that was liable to CGT, you would be able to transfer it into joint names before sale in order to make use of both your annual exemptions and possibly a lower overall tax rate.

(See the gayfinance.info website for further information on Civil Partnership.)

My wife and I have lived in our current home for three years. We also own a second property, which we bought six years ago and which has been empty for the past year. We have put down a deposit on a Spanish apartment, which will be ready in the next six months or so. Can we move into our second property and then sell it to pay for the Spanish property? Would we have Capital Gains Tax (CGT) to pay?

Maggie Fleming writes:

What have you used the second property for? You say that it has been empty for the past year, which leads me to assume that you had previously rented it out, so it was not a second home. But it may be that it was your main residence before you bought your current property? If so, you would qualify for principal private residence relief based on the period you lived in it in the past plus the final three years of ownership - if you lived in it for the first three years of ownership, this would wipe out the whole gain.

If, however, the second property was bought and used solely as an investment property and it has never been your home, you would be on very shaky ground claiming it as your main residence on the basis of a short period of residence now. While the Act does not set down a minimum period of occupation in order to qualify for principal private residence relief, it is clear from the cases that have gone before the courts that an expectation of permanence is required. This would seem to be lacking in your case, as you expect to sell it within a few months. The Inspector of Taxes would be justified in asking why you decided to move into the second property - and "to avoid tax", while it might be the honest answer, would not gain you the relief.

My parents bought a house five years ago and let it out to my brother. He has now bought his own place and my husband and I have moved in. The house has doubled in value since they bought it and is now worth roughly £100,000. I assume that my parents won't have to pay Capital Gains Tax (CGT) if they gift the property to us but would we be able to sell it on immediately? Can you also let me know what the Inheritance Tax (IHT) implications of the gift would be?

Maggie Fleming writes:

You have fallen into the common trap of believing that CGT only applies where someone sells something at a profit. In fact, it also applies to gifts. Therefore, your parents cannot avoid CGT by gifting the property to you, as the gift will trigger a tax charge in exactly the same way as if they had sold it to a third party. The charge will be based on the market value of the property.

If you decided to stay in the property for a few years, it might be worthwhile for your parents to gift both of you a share of the property in several consecutive tax years. It might be possible to arrange this over three years in such a way that your parents' annual gains would be just within the CGT exemptions for each year, especially when taper relief is taken into account. When you came to sell, there would be no CGT payable if the property had been your only, or main, residence throughout your period of ownership. Even if you moved out before sale, there would be no tax payable provided you sold the house within three years of leaving.

Of course, a gift is potentially liable to IHT as well as CGT. However, the gift will be a PET (Potentially Exempt Transfer) so provided that your parents live for seven years after making the gift, it will drop out of the IHT net.

We are considering an equity release to help ease our retirement. What exactly are they?

Equity release is something that more and more older people are thinking about. It makes sense - it is common for a retired couple these days to own a house worth half a million pounds, totally mortgage-free, but to have to watch the pennies and to have little cash left over for holidays or a new car.

How do they work?

There are two main types of equity release - lifetime mortgages, where you borrow against the security of the home, and reversion plans, where you sell your home, or a percentage of it, to a company. With a lifetime mortgage, the interest is rolled up and the lender gets his loan and interest back when the property is sold. With a reversion scheme, the buyer gets the percentage they bought, again when the property is sold - if property prices have risen in the meantime, they can do very well out of these schemes.

Which one is best?

Lifetime mortgages got a very bad reputation in the 1980s, when some unfortunates ended up owing more than their properties were worth. Nowadays, happily, many lenders offer a "no negative equity" guarantee. Furthermore, lifetime mortgages are now regulated by the Financial Services Authority, so you have someone to complain to if things go wrong. Reversion schemes are not yet regulated by the FSA but plans for regulation were announced recently.

How should we go about signing up for one?

Talk to your family first. Then ask an Independent Financial Advisor to obtain a number of quotations. Ask about what would happen if you wanted to sell the house and move into a new house or to a care home or sheltered housing. Find out what penalties would apply if you changed your mind and wanted to repay a lifetime mortgage early. Get legal advice, too, and make sure you understand how equity release could affect your benefits or tax credits.

At the end of the day, is it worth taking the plunge?

Equity release is good for many people - but make sure you know the drawbacks as well as the advantages before you commit yourself to anything. And remember there is an alternative - down-sizing to release equity and reduce costs.

If no other home is owned in the United Kingdom, are you able to nominate a home purchased abroad as the principal private residence?

My husband and I are currently living in the UK, both of us UK domicile and residents. We have sold our home in the UK, so no longer own property here and we are currently renting privately in this country instead.

If we bought a home in Dubai, United Arab Emirates (which has no dual taxation treaty with the UK), as a joint purchase in both of our names, can you tell me if we are able to nominate this property abroad as our PPR for tax purposes?

We want to make it a main residence at some point for a period of time but cannot yet go due to employment reasons. We will not be renting it out but would we need to spend a specified amount of time in the property to qualify for PPR status, or would we need to own it for certain period of time before selling it?

Maggie Fleming writes:

In principle, there is no reason why an overseas property cannot attract PPR relief. In order to qualify, the property must meet exactly the same criteria for relief as a UK property. This means that it must be a residence in the normal meaning of that word.

You will not be able to claim PPR unless you have actually lived in the property. That it will be the only property you own and that you will not be renting it out is irrelevant. There is no set amount of time you would have to spend in the property - it is more a matter of the quality of your occupation rather than the quantity. You should, in essence, make it your home.

If you occupy the UK property on a lease and a tenancy exists, you would be advised to make an election to nominate the Dubai property as your main residence within two years of purchasing it.

Quite apart from PPR, it is also worth remembering that, if you lived outside the UK for at least five complete tax years, any asset you owned before you left can be sold while outside the UK without incurring a (Capital Gains Tax) CGT charge, as the tax only affects those who are either resident or ordinarily resident in the UK. Even better, if you were away for at least one complete tax year and bought and sold an asset during that period of non-residence, any gain would not be chargeable.