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  • Tax

    CGT/SDLT Dilema Primary residence

    Hi Tribe,

    I wonder if someone could help verify or correct my thinking with a particular challenge/decision I am trying to solve:

    I am restructuring my investments, and one of the things I plan on doing is moving out of my current flat in London (primary residence) and renting it out for income instead, while I look for a new family home to purchase in the next year.

    I bought it 15 years ago and it is currently under a beautiful residential mortgage (0.25% above base, lifetime tracker!!), but which sadly does not have consent to let. Cashflow would be ace.

    But I understand that once I choose to let it out, I will have to:

    • a) Refinance with a BTL product (will considerably reduce yield and cashflow) to remain compliant.
    • b) Lose CGT relief benefits and become liable to Pay CGT at 18% or (quite likely 28%) on a future sale.

    I am trying to future proof things, and am fortunate to be in a position to pay down the mortgage totally, and ironically this would actually bring me a better ROI on total cash invested than if i were to refinance to BTL (due to 15 years of capital appreciation), i’d also get a decent income stream to help weather any potential impending recession.

    This seems to be a worthy solution to a) but doesn’t help with b) - CGT on future sales.

    To get around this, my thinking is to then transfer the flat into an SPV - so that worst case, when I slip into the higher tax bracket, I will be protected by 19% CT when I come to dispose of it in future. S24 obviously wouldn’t be a factor (unless I remortgage in the future to release equity), so the main reason for using an SPV in the short term is to mitigate future CGT on disposal.

    My dillema then is this:

    I believe could transfer the title into a SPV now without incurring CGT on the sale, however would there not be a SDLT charge on the other side for the SPV?

    And if so, is it possible this whole issue could be mitigated by using a Declaration of Trust instead?

    I don’t mind reducing my borrowings in the current climate in order to weather any potential storm brewing, and re-assess my options later. But I may perhaps be way off or overcomplicating things.

    Any help or clarification would be very helpful. Thanks a lot Smile

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    Dear Jamie,

    The transfer in theory would create an immediate Capital Gains Tax (CGT) chargeable event, but in this case, if you have lived in the property the entire period of time, this will be covered by private residence relief meaning no CGT.

    The company will however pay stamp duty land tax at the higher rates (i.e. 3% above the normal rates).  A declaration of trust that serves to move the beneficial ownership but not the legal ownership to a company does not change the stamp duty position.  Tax is based on beneficial ownership so there is still a transfer to the company.

    You should be aware that there are very negative tax consequences for living in a property held in a limited company, so before any transfer you should have moved out permanently.

    Kind regards,

    RITA4Rent

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    RITA4Rent (Rental Income Tax Advisors)

    Specialists in Landlord Taxation

    Recommended tax advisors of the Residential Landlords Association

    Follow us on Twitter @Rita4Rent

    clients (at) rita4rent (dot) co (dot) uk

    http://www.rita4rent.co.uk


    I'm in a similar situation Jamie. I don't have consent to let for a tenant but I do for a lodger, have you checked this with your mortgage provider?

    Using the rent a room scheme I can live at the property for as little as 1 day in a year ("at some time during the basis period") but I must not be away for more than a month for insurance purposes, which suits my personal arrangements.

    There's no loss of CGT allowance and the income is tax free up to £7500 pa. It works for me with a freehold terraced house in Swindon, I'm not sure whether it would be viable for a leasehold flat in London.

    Here's the full details of the Rent a Room scheme:

    https://www.gov.uk/hmrc-internal-manuals...al/pim4000

    Take particular note of the requirement in PIM4010 "It is not necessary for the residence to be the individual’s only or main residence throughout the whole of the basis period. But it must be the only or main residence at some time during the basis period"

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    A good teacher must know the rules; a good pupil, the exceptions.

    Martin H. Fischer


    Thanks for the Clarification Rita,

    Thanks Gary - that is interesting. My objective was actually to rent it out fully as we will be purchasing a family home. I think actually, rather than trying to avoid the SDLT surcharge on the transfer into a  company, it is worth paying it as it will enable me to offset paying the higher SDLT rate on the more expensive family home, since it will be a primary residence.

    And if the beneficial interest could be transferred by way of DoT withough having to pay down the mortgage, then even better, although I suspect i would need legal advice on whether that is possible..

    Although the rent a room scheme approach is very interesting too, I will definitely look into that in the interim for sure. Thanks for that.

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    The issue with using rent a room relief is that the legislation says “for some or all of the period, the residence is the individuals own or main residence.” The letting must also occur while you are using it as your main residence at some point in the year (i.e. you can’t move out after 3 months and then rent it for the remaining 9 months and claim rent a room relief).

    The problem is whether staying in the rental property for a short period of time in a tax year makes it a main residence. Staying somewhere on its own is not sufficient to make it a residence and qualify for rent a room relief. HMRC say it is a question of fact as to whether a genuine period of main residence exists. Different factors such as where you are registered for on the electoral roll, the name on council tax and lifestyle factors are some of the things that can be considered.

    Kind regards,

    RITA4Rent

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    RITA4Rent (Rental Income Tax Advisors)

    Specialists in Landlord Taxation

    Recommended tax advisors of the Residential Landlords Association

    Follow us on Twitter @Rita4Rent

    clients (at) rita4rent (dot) co (dot) uk

    http://www.rita4rent.co.uk


    "The letting must also occur while you are using it as your main residence at some point in the year (i.e. you can’t move out after 3 months and then rent it for the remaining 9 months and claim rent a room relief)."

    Unless I am completely misunderstanding the examples in PIM4015, you can move out after 3 months and then rent it for the remaining 9 months. Example 2 describes shared use for 1 week which entitles rent a room relief for the remainder of that basis period. It has to still be your main residence when you rent it, but there is nothing within the manual to state a minimum period and I have therefore made the assumption that 1 day would also qualify,

    I'm just a lodger landlord and not qualified to give tax advice in any way, so I may have misunderstood the manual.

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    A good teacher must know the rules; a good pupil, the exceptions.

    Martin H. Fischer


    Hi Gary,

    Just to clarify, what we were getting at with the comment highlighted, is you cannot claim rent a room relief if you live in the property for 3 months with no lodger, move out, and then rent the property for 9 months.

    In relation to example 2 given in PIM4015, the key is that the week either side is there is a genuine period of main residence during the first and last week.

    The example also shows the other side to this, which is the years 2012/13 and 2013/14, where the property owner spends two weeks each year in the property, but there is no period of main residence, because the owner's main residence is in Los Angeles in this case.

    Therefore moving in to a rental property on its own for a day, week or even longer is insufficient on its own to claim Rent a Room relief. It has to genuinely be a main residence.

    While there is no time limit as to the minimum period required for being a main residence, a very short period is more likely to be queried (though just because it is queried doesn’t mean you can’t demonstrate a genuine period of main residence if one exists, as per the first and last year in the HMRC example.)

    Hope that clarifies and kind regards,

    RITA4Rent

    1
    0

    RITA4Rent (Rental Income Tax Advisors)

    Specialists in Landlord Taxation

    Recommended tax advisors of the Residential Landlords Association

    Follow us on Twitter @Rita4Rent

    clients (at) rita4rent (dot) co (dot) uk

    http://www.rita4rent.co.uk