HPI out-pacing PRR accumulation

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    HPI out-pacing PRR accumulation

    I wondered if anyone else has been in this situation and what would you do about it? I now only own the one property (and live in it), but due to substantial renovation period before moving in the CGT will only increase now (assuming HPI increasing at 3.6% which is not unreasonable). I didn't understand the relevant tax law at the time, and this is obviously a huge mistake to make. I'm just wondering what my options are now. I'm wondering if I should just sell ASAP take the hit and be done with it, but it's a shame as I've put so much work into the place. On the other hand CG rates may change in the future making matters worse. Thanks.

    #2
    If the property has been your "main residence" since purchase, there is no tax on capital gain .

    Comment


      #3
      Hi Gordon, unfortunately it was not, hence the question.

      Comment


        #4
        The PRR is based on the proportion of time you have the property as your residence (currently plus 9 months) compared with the total period of ownership.
        So the calculation should be relatively simple.
        For every day you live there, you get one day more additional tax free period (and one less taxable day) and the property will increase by 1/365ths of 3.6%.
        Put that into a spreadsheet (I'd probably use months not days) with the actual figures and the answer should simply reveal itself.

        I've tried a couple of models with made up figures, and, with the major caveat that the CGT rates or regime might change in future, I can't see a situation where staying there as long as possible doesn't seem to work out to your advantage.
        Living there until you die would probably be very CGT tax-efficient indeed (although the IHT might negate the benefit).
        When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
        Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

        Comment


          #5
          The capital gain for the entire ownership period is apportioned between " live in period" which is "tax free" and "rental period" which is liable to capital gains tax at 18 % or 28% rate ( if you are paying 40% on your job income ), after deducting the tax free capital gains allowance of £12,300.

          Comment


            #6
            Would you mind to show your figures? I tried some but maybe I'm getting it wrong.

            2012 July: Purchase for £300,000 (I've already added on improvements cost)
            2015 July: Move in
            2021 Nov: Value at £450,000
            Sell now: Value: £450000.00, Profit: £150000.00, PRR: 0.68, Tax due: £13351.66
            Sell after 20 years: Value: £913681.74, Profit: £613681.74, PRR: 0.90, Tax due: £17511.71
            These figures assume 28% tax rate, and don't take account of allowances or other income.
            So the amount of the tax is always going to be greater over time.

            Comment


              #7
              Capital Gain during rental period = £150,000 x 3/9.5 = £47,368.

              Tax due = £47,368 x 0.28 = £13,263 which is roughly 9% of your £150,000 total profit.

              Why are you complaining at paying 9% hit ?

              Comment


                #8
                Originally posted by lllccc View Post
                Would you mind to show your figures? I tried some but maybe I'm getting it wrong.

                2012 July: Purchase for £300,000 (I've already added on improvements cost)
                2015 July: Move in
                2021 Nov: Value at £450,000
                Sell now: Value: £450000.00, Profit: £150000.00, PRR: 0.68, Tax due: £13351.66
                Sell after 20 years: Value: £913681.74, Profit: £613681.74, PRR: 0.90, Tax due: £17511.71
                These figures assume 28% tax rate, and don't take account of allowances or other income.
                So the amount of the tax is always going to be greater over time.
                Two points:
                My figures are slightly different to yours because I calculated based in the number of months to the end of 2021, but they're in touching distance.
                And planning tax 20 years into the future is a mug's game, the chances of the tax regime staying the same for that long are remote, and it throws the assumptions off.

                But, ignoring that.
                If you sell today: You have a gain of £150,000, with 27 taxable months out of 113 owned.
                Your taxable gain is 23.5k (with the personal allowance deducted to get that figure).
                So you'll pay about £6.6k tax - which is about 4.4% of the gain..

                If you sell in 20 years: You have a gain of £618,000 (based on a value of just under £918k),
                Your figures show the PRR being .9, which they won't be if you let it now.
                But on the same basis as your figures, the taxable gain would be just over £35k with tax being under £10k, which would be about 1.6% of the gain.

                If you're going to let it out next year, the PRR doesn't change, because it stops being your residence.
                So the 20 year gain is still £618k, but 265 of the total 351 months would be taxable, so the taxable gain is £454k, with the tax at 28% being £127k, which is 20.5% of the gain.

                But what you're ignoring, I think, is that the returns to you are massively different as well.
                If you sell now, net of tax you get over £143k, in 20 years, you get about £491k.
                On the basis of your own calculation, where you continue to live there, your gain is just over £608k.

                And I'd caution against tax planning (or most kinds of planning at all) over that kind of timescale.
                I have business plans for 1 and 3 years and vague intentions for 5 and beyond.
                And my 3 year plan of three years ago didn't include a plague and a death - both of which have somewhat undermined the thinking.

                My guess is that CGT rates and allowances are going to change (rates up, allowances down) within a few years, regardless of who's in power, to bring them closer (Conservative) or into line (anyone else) with income tax.
                When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

                Comment


                  #9
                  Thanks jpkeates.

                  I should first clarify by saying I never intend to rent out my current property. You may ask why I'm therefore asking about this on a Landlords forum, just inertia because I asked tax related questions here before, and this does relate to owning two properties simultaneously!

                  You are right that planning 20 years into the future is problematic. The problem is I have failed to do any tax planning in the past and this has been somewhat costly for me. For instance with two overlapping properties and an extensive period of renovation I should have nominated the new property as my primary residence. This was a huge mistake, because it kicks the CG burden into the future, and places it on the higher value property. The CG on the old property would be bounded because it would be sold in some finite time and a higher proportion of it within allowances. By staying in a new property without 100% PRR (having left the rental business), not only do you lose the bonus on the last few months but you leave yourself open to what is effectively retrospective punishment for having made the wrong choices in the past if the law changes. I would like to think that any CG reform will start to (sensibly) take into account the affects of inflation but there's no guarantee of this, because at the moment the government benefits hugely from taxing people on gains that they haven't made in real terms.

                  I see the point you are making about returns. I think I worked out that If I keep the property for 200 years (assuming I lived that long), I'd have huge PPR portion, but a tax bill of about £5 million. This would be small compared to the value of the property by then of course, but it's still out of proportion to any gain made during the period of renovation. The affects of this tax bill are reduced by inflation, but my position is not nearly as comfortable as if I 'bed and breakfast' (for want of a better phrase) my investment and somehow reset the PRR to 100%. Of course bed-and-breakfasting a property is un-viable due to stamp duty, but hopefully you get what I mean.

                  I don't think my situation is the same as someone who's letting a 2nd property, so I don't agree with Gordon that 'it's only 10% so shut up and stop complaining', the fact is he's making use of his full PRR allowance (I'd assume) and collects some rent as a bonus, whereas I'm not enjoying the full PRR even though my ongoing situation is the same as anyone else who's occupied since purchase. If I had the opportunity to 'settle up' my CG liability right now @10% then of course I'd do it and move on, but HMRC provides no such option.

                  I am 99.99% certain the gov will not tax gains on a primary residence, this is a sure-fire vote-loser. Other than that, as you say we don't really know.

                  I was hoping for advice on figuring out whether I should sell this house, forget about the problem and make plans to live in the place until death, entrust to my children now, gift to my children when they're 18 or if there are any other things I've missed. I think I may ultimately need to pay for specialist advice but I thought I'd check here first. What I don't want to do is find myself seeing a law change on the horizon, then have to sell in a hurry for knock-down price. I'd rather have a strategy in place up-front so I don't have to think about this when it happens.

                  Comment


                    #10
                    You can only nominate your primary residence to HMRC for tax purposes if you genuinely live in more than one place, and, unless you were genuinely living in the property you were renovating, that option wouldn't really have been available to you. It's a relief on residence, not ownership.

                    Don't forget that all of the expenses that added to the property value are deductable for CGT purposes.

                    I don't think the government would tax gains on people's homes, I just think that CGT needs to be looked at as a concept. If I ran my business as a limited company, any gain in asset value would be income, and it's an anomaly that's difficult to explain other than as a way of allowing rich people to pay less tax than working people.

                    The advice you're looking for about selling the property or passing it on to your children need two different people, an accountant and a solicitor or a specialist tax advisor. There tend not to be too many of the latter who aren't trying to sell you something, and I use my accountant and solicitor as a sounding board.

                    Without some kind of trust structure, it's hard to gift things to children while continuing to benefit from them, and that can also address the IHT issue over a period of time.
                    When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                    Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

                    Comment


                      #11
                      Yes, that's correct but the definition of 'genuinely living' somewhere is somewhat vague. Most people will need to spend some time in a property for insurance purposes, and if working on the property it's convenient to stay there overnight. It comes down to the evidence presented. If you don't change the electoral register or your bank home address, and you're dumb enough to send all your bills to the old address, then you'll have a hard time convincing anyone you live in the new address. So long as you are consistent then you can effectively choose. I don't think there's any count of how many nights you spend where. I mean, if you weren't doing the work yourself, then the renovation period would be short because the builders would want their cash, so much less of an issue.

                      I think you're incorrect that any expenses added to the property are deductable. My understanding is that a whole load of expenses during a renovation will not be deductable, for instance if 1st set of workmen mess something up that you then have to get another lot of workmen in to fix. The 2nd set of work is then potentially maintenance right? Or at the very least you could have some arguments with the tax man because the work is not 'visible'. I've heard a lot of conflicting reports about this on various forums.

                      Comment


                        #12
                        Originally posted by lllccc View Post
                        Yes, that's correct but the definition of 'genuinely living' somewhere is somewhat vague. Most people will need to spend some time in a property for insurance purposes, and if working on the property it's convenient to stay there overnight. It comes down to the evidence presented. If you don't change the electoral register or your bank home address, and you're dumb enough to send all your bills to the old address, then you'll have a hard time convincing anyone you live in the new address. So long as you are consistent then you can effectively choose.
                        There are really two options.
                        HMRC may simply accept your nomination, there's a lot of tax discussions that are theoretical because HMRC has finite resources.
                        If they don't accept your nomination, or have a query later, they'll simply want evidence that you were living where you say you were.
                        And it's not particularly that it's vague, it's something that's a matter of fact - and the facts are going to be unique in every case.
                        You can still be living somewhere even if, right now, it's uninhabitable.
                        And you're right, it's a set of things that establish where you live - where your children go to school, where your dentist is, where your bills are sent and so on.
                        They'd probably also expect to see some kind of pattern, most people with more than one home don't randomly move between them, they weekend at one, or spend school holidays somewhere.

                        I think you're incorrect that any expenses added to the property are deductable.
                        I don't think I'm incorrect.
                        Expenses incurred solely and exclusively for the business are allowable (unless they fall into a category specifically not allowed).
                        They may not all be capital, because that's up for debate, but, if not, they're operational, so they're still allowable.

                        My point was that expenses that add value to the property are likely to be capital.
                        But it's an art not a science.
                        If you're replacing a bathroom with a more modern one, it's likely to be operational (because HMRC accept that new more modern replacements will have an additional value implicitly).
                        If you convert a traditional bathroom to a high end wetroom, it might be both capital and operational.
                        If you convert part of a bedroom into an en-suit it's likely to be capital.

                        My understanding is that a whole load of expenses during a renovation will not be deductable, for instance if 1st set of workmen mess something up that you then have to get another lot of workmen in to fix.
                        That doesn't change whether something is allowable, just allowable when.

                        But, at face value, if the original work would have been capital both sets of costs would be capital.
                        You started with something and ended up with something else and it took more money than you expected.

                        The 2nd set of work is then potentially maintenance right?
                        It could be, but it would depend on the facts.
                        If 1st workmen are adding a new garage and completely mess it up, 2nd workmen sorting it out aren't maintaining anything.
                        If 1st workmen add a new garage and the guttering falls off a month later and 2nd workmen replace it, the replacement is probably maintenance.
                        When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                        Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

                        Comment


                          #13
                          Originally posted by jpkeates View Post
                          There are really two options.
                          HMRC may simply accept your nomination, there's a lot of tax discussions that are theoretical because HMRC has finite resources.
                          If they don't accept your nomination, or have a query later, they'll simply want evidence that you were living where you say you were.
                          And it's not particularly that it's vague, it's something that's a matter of fact - and the facts are going to be unique in every case.
                          You can still be living somewhere even if, right now, it's uninhabitable.
                          And you're right, it's a set of things that establish where you live - where your children go to school, where your dentist is, where your bills are sent and so on.
                          They'd probably also expect to see some kind of pattern, most people with more than one home don't randomly move between them, they weekend at one, or spend school holidays somewhere.
                          OK, I don't think you got this quite right. I think you may be conflating two things:

                          1) The burden of proof for a nomination
                          2) HMRC's assessment of the facts as they present themselves where no nomination has been made.

                          For 1) where your children go to school is irrelevant. For 2) it's of paramount importance.


                          Originally posted by jpkeates View Post
                          I don't think I'm incorrect.
                          Expenses incurred solely and exclusively for the business are allowable (unless they fall into a category specifically not allowed).
                          Well that's very nice, but I have no business, I'm PAYE, so I suspect I can't claim anything there . Thanks for the other points about maintenance vs capital, all useful info.


                          Comment


                            #14
                            I just realised there is an allowance for renovation, can be 1 year but can be extended up to 2 years in some circumstances. I guess I should investigate this:
                            https://www.gov.uk/government/public...relief-2017--2

                            "...or you need to carry out refurbishment, you can treat up to the first 12 months as if the house had been your only or main residence in that period. In exceptional circumstances, we may allow you to treat a longer period (up to a total of 2 years) in the same way. The same treatment applies when you buy land to build a house on."

                            Comment


                              #15
                              Originally posted by lllccc View Post
                              OK, I don't think you got this quite right. I think you may be conflating two things:

                              1) The burden of proof for a nomination
                              2) HMRC's assessment of the facts as they present themselves where no nomination has been made.

                              For 1) where your children go to school is irrelevant. For 2) it's of paramount importance.
                              I'm not conflating things, I'm summarising (not very well) the case law that HMRC (and courts and tribunals) are meant to rely on in determining whether somewhere is your home or not.

                              In what circumstances would HMRC make an assessment of the facts where no nomination has been made.
                              When you make a claim for PRR, you're essentially making a nomination.

                              Well that's very nice, but I have no business, I'm PAYE, so I suspect I can't claim anything there . Thanks for the other points about maintenance vs capital, all useful info.[/QUOTE]
                              Yes, sorry, I was stuck in landlord "mode"!

                              You'd be asserting very strongly that everything is a capital expense!
                              When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                              Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

                              Comment

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